The Debates

The debate last night was clearly the most heated of the three between McCain and Obama, but nobody promised to completely wean the U.S. off foreign oil by 2020 or cure AIDS. I thought that Obama had an interesting but very risky opportunity to put McCain away on the question regarding the negativity of both campaigns. McCain is on the ropes at this point and basically has no choice but to continue the jabs. Obama, however, could have offered a quid pro quo--something like "I am willing to stop referencing you in all my ads and focus only on my platform and the positive attributes I bring to the table, if you are willing to do the same." McCain could not have accepted those terms, because negativity is his only chance of winning at this point.

The second debate is over what the market will do in the near term. As I write the this, the Dow Jones Industrial Average has gone from positive territory to as low as about -350 and is currently at -100. Crude is sliding down too. As happened before, I am expecting a rally down the road, with the possibility of more downside first. (Helpful, huh?) Right now my portfolio is 100% cash, but I will begin scaling into the market today, as the VIX has hit another new high.

A great strategy on a volatile day like today is to pick stocks that already seem like a bargain and sell out-of-the-money put options on them. This will work especially well for stocks with good dividends that you would like to hold for a while, e.g. KMP, JNJ, LINE, T, PBT, CVX, MO. Selling put options is especially risky, because if the option expires in the money, you'll be required to buy stock at the strike price, even if the market price is way below the strike. In other words, you'll suffer an immediate loss to the following extent: Loss=strike price - premium received for selling option - market price.

One way to alleviate this risk is with a spread, which means selling a lower strike price option and buying a higher strike on the same underlying (bear put spread, i.e. you expect the price of the underlying to fall) or selling the higher strike and buying the lower strike (bull put spread, i.e. you expect the price of the underlying to rise).

I will also start dabbling in indexes and index options. The S&P has support at about 850, so I will buy it there with a tight stop.