The silliness has quite a ways to go before our DJIA target at 13045 is reached, but yesterday's show of exuberance will surely have earned the bulls the benefit of the doubt, if not the heart-felt respect of bears, for the time being. By way of earlier Rick's Picks recommendations, we'd been riding call options in two high-beta performers ' Merrill Lynch and Citigroup ' but yesterday seemed like a good time to take some profits. In the case of MER, we exited the last of our position in October 80 calls outright, intending to jump back in on a pullback. This was not to be, however, since the stock's biggest pullback of the day was just 57 cents ' barely enough to cause the call options to soften much. In fact, calls were so hard to buy on the bid intraday that it seems obvious in retrospect that the market was destined to move higher. In Citi, we were long December 50 calls coming in but used the rally to turn the position into a calendar spread, shorting October 50 calls 1:1. We did so when the calls were trading 50 cents above the previous day's close, but they went still higher, peaking at 1.50 before settling at 1.45. The adjustment to our position will lock in the December 50 'October 50 call calendar spread for 0.80, at which price it will be very hard for us to lose. The adjustment also implicitly erases earlier losses we had imputed to our December 50 calls, which we carried at 2.10. When we shorted the October calls against them yesterday, we were not exactly shooting in the dark, since the sale was predicated on a rally in the underlying stock precisely to a hidden Pivot target at 50.95. As it happened,
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