There was no shortage of excitement last week, and fortunately, the markets did make progress in recapturing some of the losses from the week before. Between delays in reciprocal tariffs and certain exemptions, the news continues to change by the day. First, I’ll reiterate the main theme from last week’s email, which was that we’ve planned and prepared for these conditions. Sticking to the rules in place is the best way to remove the emotions from your investment decisions and achieve long-term success.
Today, I wanted to share my expectations and experience for Trade Day under similar scenarios in the past. The cause of the market declines is always different, but simply looking at today’s price levels compared to last Trade Day, we’ve experienced this type of drop many times in the past. Each time, sticking to the rules helped maintain our income and a stronger recovery sooner.
Whether you’ve made frequent trips back from Bora Bora this month or Trade Day will be your first review of the account, it can be alarming to see some changes in stock prices. Some may have been hit harder than others, and it can be nerve-racking to see big declines. One thing that never ceases to amaze me in these markets is how fast prices can move and how large the movements can be. It can and will happen in both directions, but right now, we are dealing with declines.
It is at this point we often ask ourselves if it makes sense to keep buying, but the answer is Yes. First, these purchases help lower our average cost. This gives us the ability to close a position without the need for it to recover all the way back to its highest price. Next, these purchases will be the key to this month’s income. At a minimum, we should always be able to sell a call over our most recent purchase.
Now, when it comes to selling calls this month, this most recent purchase will likely be the only one we will be able to cover. So overall, it is common to sell fewer contracts after a steep correction which impacts our income. But, these options should pay good premium. The high premiums we receive for the calls we can sell may not make up for all the difference when selling fewer calls, but it does allow us to keep the income stream in place during bear markets.
Volatility, or the potential for a stock’s price to move higher or lower, is significantly higher right now than it has been in the recent past. It always spikes in times of uncertainty and bear markets. It also plays a direct factor in an option’s price. So, when volatility is higher, we get paid more for the options we sell. Higher volatility is the biggest reason we should get paid more for the options we sell next week. Overall, even with the benefit of volatility, I would expect us to have a below-average month in terms of option premiums. But, if markets do stay at these levels or recover quickly, we will quickly get back to more normal months as we establish more purchases in this price range.
Since next Monday is Trade Day, you won’t see a note from me, but I will follow up in two weeks to give my perspective on how things stand. In the meantime, I hope everyone has a very Happy Easter. (On that note, markets are closed Friday, so options expiration is officially Thursday.) Please enjoy the long holiday weekend. On Monday, remain confident in the Snider Method and its ability to handle difficult markets.
As always, thank you for your business.
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