Popularity
Markets have an ebb and flow that takes them from panic to euphoria and back, often in a matter of days. We have no way of predicting Mr. Market's mood, but we can take the advice of Ben Graham by selling when he's ecstatic and buying when he's depressed. Doesn't this run counter to following the trend? Yes, that's why we study markets using multiple time frames. An overdone rally in a shorter time frame may be just a blip to the longer time frame, but we use it to reduce our risk by adjusting our options. We maintain upside exposure, but trim downside exposure back to our desired amount.
Changing Reality
Our vision of markets says that they discount the future business reality far better than 99% of analysts, certainly better than we can. Therefore, when they speak to us by breaking a trend of higher highs and higher lows, we take that message to step aside and wait for resolution.
As you can see, we have both an offensive method (rolling options) and a defensive method (selling) for dealing with market downturns. On top of limiting our worst-case scenario by owning options instead of stock, we've constructed a sturdy set of tools to keep us in healthy markets without worrying about a "crash" or devastating bear market.
