Yes, I’m working overtime today. But today is important and I wanted to make a few observations for those of you that are new to options trading. It is 11:30am and the Dow has lost nearly 300 points and is currently at 7,990. My last update was just a half hour ago and I said the smart money says we head lower. Here we are.

Monday morning I had this to say about the financial trades that had given us some nice returns: “It would be wise to take a majority of these profits off the table ahead of Tuesday’s announcement. I’m not sure if these stocks will continue higher or if we get the “buy the rumor, sell the news” curveball. I would hate to see you give up 50%-200% gains by trying to squeeze a few extra dollars out of the trade.” –

This was huge. I’m not Geico but I just saved you a bunch of money on option trading. We did get the “buy the rumor, sell the news” event and for the option traders who went long yesterday on some of the trades we had going or if you left them open, you are getting crushed.

Bank of America (BAC, $5.86, down $1.03), Goldman Sachs (GS, $90.39, down $7.50), JPMorgan (JPM, $25.64, down $1.64) and Visa (V, $54.21, down $1.11) all took a turn for the worse when Geithner started speaking.

How much of a swing did we get? Take Goldman Sachs for example. We entered the February 100 calls (GSBT, $2.50, down $1.95) at $3 on Friday and they were sold Monday at $4.50. If you got in late or held the position, you have given back all of your gains and now have a loss. This is what happens if you don’t follow the market closely or take profits when they are given to you.

New options traders will continue to hold these calls in hopes that they may come back and they might. But often times this is not the case. The smart money was in-and-out and now we are looking for other trades.

Rick Rouse
Rick@OptionsMentoring.com