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Financial Crisis Options Risk Management

Stock Options Risks

We have weathered the 2008 Financial crisis and collapse of Lehman Brothers, the 2020 Covid Pandemic and now the Silicon Valley Bank collapse put the markets in turmoil.

What is next? Every few years something happens that throws the stock market into turmoil. It’s inevitable. And it’s going to happen again. The question is are we prepared for it?

In this video we discuss: 

  • What do we do in the financials after this recent Silicon Valley Bank collapse?
  • How do we protect against a further overall fall in the market and not miss the move up?
  • How do we ensure that we don’t get slaughtered in the next crisis and drop in the market?

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Hey guys, Darren here. Thanks for reading. 

We talk about action steps you can take today to increase profits and reduce risks in your portfolios by trading options. 

Real quick: Please check out and download the FREE options Workshop in the link below. It talks about the two main reasons why options can be less risky and more profitable than just buying stocks alone. It also details how to profit in both directions and pick your win percentage which you can’t do just buying stocks alone. 

FREE Options Workshop

Also, please hit the like and subscribe button below! I appreciate it as it helps to get the video out to more people.

DISCLAIMER, I am not a financial planner and I am not recommending trades. Please do your own research and if you are new or learning options, I recommend you start small.

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What do we do in the financials after this recent Silicon Valley Bank collapse?

We always want to take all factors into account when we are trading stocks and options. It’s sometimes hard to understand how things will unfold especially when they often don’t seem to make sense. 

When things like this happen we need to look at the facts and go by them. I covered some of these in the last video I will link to below.

 Valley Bank Collapse – Bank Stocks LEAPS Option Opportunity

We took a close look at whether the collapse was contagious and could lead to other Bank collapses as well. First of all the big banks like Bank of America, Chase and Wells Fargo are much more balanced and not leveraged to Tech Startups the SVB was. 

Secondly, Biden just bailed out the companies that borrowed from the bank indicating that they would not lose their money and interestingly enough that taxpayers wouldn’t pay for the bailout. We all know that it will trickle down to taxpayers footing the bill so don’t buy that!

Bottom line, when you look at the low PE’s of 11 for bank stocks right now they are cheap. Also financials are expected to be one of the sectors that has the most revenue growth in the second half of this year. 

For those reasons, I like to be long the big banks like JP Morgan Chase, Wells Fargo and Bank of America. 

How do we protect against a further fall in stock prices and not miss the move up?

Trade both sides 

We have covered previously that stocks trade in both directions since the market is efficient and there has to be both buyers and sellers. So even if we think we know a stock is moving up long term it will move down about 50% of the time in the short term.

Work towards Delta Neutral

For this reason, we trade both sides of the market. We always want to try and be fairly close to delta neutral so that we can collect money when the market moves down as well as up. 

How do we trade both sides of the stock market?

I cover this in some detail in the FREE Workshop. We put on opposing side trades on big movement days.

On stock market big down days

When the market moves down, IV typically increases and option premiums increase so it is generally a good day to place new trades and collect larger premiums when we sell options which is what we prefer to do.

I may be long stocks and have a couple hundred positive deltas. So then I need negative deltas so I put on Iron condors or strangles and trade both sides. Why? Shouldn’t I only be putting on negative delta trades like Selling Calls and Call Verticals to become more delta neutral. 

In this case I still like to put on neutral trades. Because the market can still go either way and I can collect good premium with the increase in IVRs.

On stock market big up days

On big up days I like to add negative delta. If IV is super low use debit spreads. If it is decent, I Sell CALL Credit spreads or Calls. If I own stock, I sell a Call to make it a covered call. If I own LEAPS then turn it into a PMCC by selling a Call to reduce basis.

Since we are generally long stocks we think will outperform the market, I like to use ETF’s like SPY and QQQ to short the market. 

How do we ensure that we are ready and don’t get killed in the next big crisis and drop in the market?

We Stay Small 

When trading options we are using leverage. So we don’t need to trade as big or as much to make the same money we would make if trading stocks alone. So we need to stay small to avoid losing a lot on a big move.

Max number of contracts

As you become more experienced you will become more comfortable in knowing what your maximum lot size is. You may want to be a 1, 2 or 3 lot trader. It depends on your account size. If you were a 3 lot trader, you should start with 1 lot. If the trade goes against you and you still believe in the fundamentals of the company then you add a 2nd lot and then a 3rd as your max. 

Max amount per trade

You should limit your max amount of capital per underlying so that you don’t put all your eggs in one basket. For instance, you don’t want to have 30% of your trading account in bank stocks when they take a hit. I like to have no more than 5% in any one underlying.

Max amount based upon SPY

You should always be aware of how much you trade long, short and in total. 

When the market is at all-time highs and 30-50% above the average S&P trend lines, I like to have a lot of money on the sidelines waiting for a drop. With the market at highs the risk is much more to the downside versus the market skyrocketing up further.

At the same time, when the market is at lows and 30-50% below the trend lines I like to be more invested. Maybe 85% or so invested for a small account. And 50% in a large account. I will also have more long trades on knowing that with the market at lows the risk to further downside is limited.

Key Takeaways

With PEs at lows and positive earnings in the second half the big banks look good right now.

Look to trade both sides of the market and benefit by placing new trades on big up and down days.

Lastly, always stay small and aware of your capital at risk. This way you avoid losing lots of money and have capital on the side ready when a big move occurs.

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Alright guys, I’ve put a link down below for the FREE Options Workshop. Be sure to grab that. It discusses exactly how to profit month after month utilizing option trades like this one.  

Please let me know how you feel about the trade we just placed and what you’re trading in the comments below.

Thanks for reading and see you in the next one!

Options Risk Management