lystn

Hey everyone, Kirk here again and on today’s daily call, I want to talk about why “buy the dip” is terrible investing advice. This is something I’ve mentioned before on a Facebook Live we did a couple of months ago, but it's worth repeating here because we continue to see people fall into this terrible, terrible investing advice trap and that is this “buy the dip” mentality. Where does this come from? This comes from this idea that when the markets go down that that is always the best opportunity to buy up more securities. In fact, recently, just a couple of weeks ago, we heard this with Facebook when they announced earnings that it was a “buy the dip” type of opportunity or if Tesla goes down, it’s a “buy the dip” type of opportunity. But here's the problem with “buy the dip” when you trade options and when you’re truly neutral. Let's assume that your portfolio right now and the stock is trading let’s say around $100. Let’s say your option position around that security is totally neutral. You’ve got positions on both sides, you’re not taking any directional bet whatsoever and the stock is trading at $100, your portfolio graph or distribution is totally neutral. Well, when the market goes down and the security goes from $100 to say $90, it didn't change your position. That’s the key that everyone doesn’t get or apparently doesn’t get until they maybe listen to this podcast. But the stock going from $100 to $90 had no effect on where your positions were. Now, the pricing of your positions may change, but the overall effect of where you want that stock to land never changed. You still want the stock to land around $100. That's the neutral position that you built originally. That’s the best possible scenario for you to make the most amount of money. The stock going down by $10 doesn't change the fact that you now need the stock to rally to get back to neutral or to have the best opportunity to make money. This is where this investing advice becomes really terrible because say you were to buy additional security or additional stock or just in the case of options trading, go long that stock during a “buy the dip” scenario, you would create a situation where you are even more bullish than you are right now. Remember, the stock went down, your portfolio is naturally now more bullish just by this sheer fact that the stock went down and you need it to go back up to get back to neutral. You’re already in a sense, bullish. Why would you continue to buy the dip? Why would you continue to go even more bullish as the stock goes down? Now, this is why in all honesty, people get into this trap and then it's a self-fulfilling prophecy that they end up losing more and more and more money because think about what happens here. Think logically about what happens. If the stock goes from $100 to $90 and you go long the security, when your portfolio already has exposure to long, but you add more, you buy the dip, you go long the security with options or stock, it doesn’t matter, you go long the security, now you created a situation where if the stock goes lower, you lose exponentially more than you would’ve before because now, you’re long the security even more so than you were before, so if the stock continues to go lower, you're digging yourself deeper and deeper into a hole. What people often do is that if the stock goes now from $90 to $80 and they go long because this is a “buy the dip” opportunity, so they continue to go long the security, again, whether with options or stock and then stock goes from $80 to $70 and $70 to $60, etcetera, etcetera, etcetera… You get the idea. They end up losing a ton of their money because they just keep going long the security. They keep buying stock, they keep going long with options and it just becomes really, this painful cycle that they get into. What we say on the other hand is that when the market goes down, you play the move. You play the directional move in the market. If your portfolio is neutral around $100 and the stock goes down at $90, well guess what? You don't need any more bullish exposure. You’ve already got a position that's centered at $100, so if the stock rallies, you’ll make your money back, you're good. What you need is you need more bearish exposure, so if the stock does continue to go lower, you want to start to shift your payoff diagram lower with the stock. That’s one of the core competencies that we have here at Option Alpha, is that we want to trade the directional move of the market. If the market goes down, we’ll actually add more bearish positions to balance out our portfolio. Imagine that the stock continues to go down and down and down and down and down in a market crash scenario. We would continue to add bearish, bearish, bearish trades all long. Although we might have lost on the first initial position, the subsequent positions that we add behind that or after the stock starts moving lower are all bearish. It’s all in the direction that the market is moving, so we don't get ourselves into a situation where we’re digging ourselves deeper and deeper into a hole. Hopefully this makes sense. If you guys enjoyed this one, I’d love for you guys to send it to your friend or a family member, a co-worker, somebody who’s in the stock space that has maybe done this before or maybe you just think that this is a good piece of advice to share. I think that would be helpful for us. But as you can see, obviously my kid is up because she’s screaming in the background in the baby monitor, so until next time, happy trading and we’ll talk to you guys soon!