Beware Stock Market 'Facts' –

This post was originally published on this site

Here are some market dictums that should not be taken at face value.

1) “Don’t short a quiet market.” Wrong. The dictum is only correct if the market is rising quietly. Short a quietly declining market until you run out of money.

2) “There are many reasons for selling, but there is only one reason for buying.” Wrong. There are two reasons for buying. The first one is obvious — greed. The second one, which 99.99% of stock market mavens and retail traders miss, is where shorts Buy back stock (cover short sales) when they either take profits or cut losses.

3) “90% of all options contracts expire worthless.” Wrong. The CBOE, using real facts and data — as opposed to some options guru trying to sell you something — knows that, at the maximum, only 35% of all options expire out of the money.

4) “The VIX is a gauge of stock market fear.” Wrong. Most times that is true, but know that it is not true 100% of the time. Want proof? In January 1995, the Dow was 3,800 while the VIX was 12. By the summer of 1998, the Dow was nearing 9,000 while the VIX peaked at 44. The Dow (et al) and the VIX moved up in tandem for over two straight years. Far too many in the financial media are unaware of this. But of course, most of them never traded stocks and options for a living.

5) “Options trading professionals are gamblers.” Wrong. Every options professional I know traded and still trades the “greeks.” They use a “Positive (or Negative) Gamma-Delta Neutral” strategy that rewards them quite handsomely. Unfortunately, 99.99% of the public and so-called trading professionals are clueless to this strategy — which has rewarded me quite handsomely over the years. It is best to seek out this knowledge if you want to improve your trading skills. I wrote on the “positive” gamma strategy in late September of 2015.

6) “Wall Street brokers do not make money from their customers’ short sales.” Wrong. When a customer of a Wall Street firm sells a stock short, a credit balance (as in lots of $) is created by that sale. That credit balance is used by the customers’ firm as the customer’s firm lends out their customers’ credit balances. The firm receives the interest, which is paid daily, while the customer remains clueless to all this interest on the customer’s money being collected by the customer’s broker/firm. In times of higher rates of interest, firms make a tidy profit from this interest paid to them.

During my time as an options professional trader, my annual interest rate credit received was between $75,000 to over $100,000. My contractual arrangement with my clearing firm/broker was that I would receive the vast majority of my short credit balance interest — and not the firm.

7) “The biggest risk for options traders is the un-hedged long call or long put.” Wrong. By a wide margin, the most amount of capital lost by options traders, since the inception of listed options trading in 1973, came from the naked short put and the naked short call positions. In the Crash of 1987, I personally witnessed two professionals lose $5 million and over $10 million, respectively, in one day, merely because they were short naked puts. These two “pros” were forced to leave the business. And over the years, I witnessed far too many pros being naked short calls (in size, like well over 100 calls or more) on stocks that rocketed up in price as the news hit the ticker that those stocks had “caught a bid” (as in a take-over announcement. Those stocks were halted, only to gap up in minutes to hours — so far up in price that their naked call shorts destroyed their capital accounts.

8) “The tabulated-weekly (now for 30 years) AAII Investor Sentiment Survey is good stock market intel.” Wrong, unless you do the opposite of what the numbers show. Why is that? Well, the average for those AAII Bulls (who are presumably long the market) for 30 years now is only 38.5% of the AAII’s total sample. The Bear gang’s 30-year average is 30.5% (they presumably short the market) and those in cash (the Neutrals) have a 30-year average of 31%. Adding up the Bears and the Neutrals (those not invested in stocks) one gets 61.5% of the total sample not long stocks — for what is now 30 years! And 30 years ago the Dow was around 2,000. Today, of course, it is over 21,000. I rest my “fade the AAII numbers” case.

Be careful of what you accept as being accurate stock market factoids. That caveat, ironically and naturally, includes what I just wrote.

This commentary originally appeared on Real Money Pro on June 9. Click here  to learn about this dynamic market information service for active traders.