March 2009

We remain long the July 115-April 115 calendar spread for 6.00 and short an extra April 115 call for 3.80. Since Friday’s gap-down opening exceeded my 96.68 target, we should expect lower still prices over the near term. I won’t be at my desk Monday morning to fine-tune a defensive strategy on-the-fly,  but as of Sunday afternoon, I’ll suggest buying the April 90-85 put spread two times for anywhere between 1.50 and 1.60. That price assumes the stock is trading near Friday’s settlement price of 96.66, but it would go up or down if the stock moves, respectively, lower or higher.  Whatever the case, you should shoot for a price about midway between bid and offer on the spread.  This addition to our position is meant as a short-term hedge against immediate downside risk.  _______ UPDATE (11:59 p.m.): Lower the bid for the put spreads to 1.20, since the E-mini S&Ps are up 14 points Sunday night and threatening to ream bears a new orifice when stocks open on Monday.  _______ FURTHER UPDATE (10: 01 A.M.) :  Goldman shares led Monday’s morning’s short-squeeze higher, making the April 90-85 put spread an easy buy for 1.10. We’ll record a 1.20 price officially and let it ride. If you work the numbers, you’ll see that at April expiration our total position now yields a theoretical profit come,  almost literally, hell or high water.  To the upside, the profits would ebb away above $130,  but the stock would first need need to ascend past 115, in which latitudes paper gains on our position would fatten so quickly as to possibly warrant an early exit from it.

It’s not for no good reason that out-of-the-money options in this stock are trading with implied volatilities as high as 245.  The stock moves as violently as any I can recall from the dot-com era,  presumably because it is bear-bait at $100 per share. My immediate downside target is 96.68, but we’ll do nothing for now to adjust our position: long the July 115-April 115 calendar spread for 6.00 and short an extra April 115 call for 3.80.  The easiest way to keep track of this spread is to think of ourselves as long two July calls for 4.10 (they are currently trading around 9.80; this is the cost of our spreads, reduced by what we took in for the extra April call). _______ UPDATE (Friday, 12:35 p.m.):  Offer an April 110 call short for 5.60. This will give us more “gamma” (i.e., frontspread) exposure to the upside, but it will be somewhat neutralized by time decay with March calls expiring today. I may lower the price before day’s end, so check back.  _______ FURTHER UPDATE:  (1:53 p.m.) The rally was short-lived, and the April 110 calls traded no higher than 4.60. (My 5.60 sale price was based on the C-D midpoint of a price pattern in the option itself. That price was very ambitious, and in retrospect I might have checked the stock’s chart itself, since it would likely have disillusioned me about shooting for 5.60 on the calls.

As of 11:30 p.m., the futures were groping for a bottom, two ticks off an in-your-face target at 773.50  that we’d pondered during the impromptu webinar convened earlier in the day. A penetration of this Hidden Pivot support by more than two ticks would probably set up another weak bounce from 771.00, the next support in a sequence of minor ones;  and thence from 765.75, my worst-case low for overnight and the first 30 minutes of Friday’ s session. Alternatively, the 809.50 target broached here earlier is valid and will remain so unless 746.00 is exceeded to the downside. If the futures head south for another day without having reached 809.50, it would add to the evidence that the bear rally begun last Monday is not destined to be either long or memorable.

Since we’ve considered the VIX today, we might as well drop in on another vehicle that has not gotten much ink in Rick’s Picks: Soybeans. The July contract has a beautiful pattern that points to a tradable top at exactly 955 6/8., and you could probably short there with a stop-loss as tight as 3-4 ticks.  If the stop is hit, though, look for the rally to continue higher, possibly renewing the bull trend with a push above the very subtle look-to-the-left peak that I’ve labeled.

A new subscriber asked in the chat room whether I track the Volatility Index.  I haven’t done so in the past, but I will if it promises to give us an easy ride to profits. One thing I like about the VIX is that the puts and calls look fairly liquid — unlike those in, say, gold.  Also, my hunch is that VIX is not as heavily scrutinized and over-traded as some of the vehicles we trade, and that means » Read the full article

Two weeks ago, I posted a 90.26 target for the Dollar Index without considering its potential importance.  Because this target was six months in coming and encompassed half of the dollar’s bear rally from the March 2008 bottom, I probably should have drum-rolled and billboarded it;  instead, I noted merely that a move past the target would telegraph more upside amounting to as much as 5%.  DXY ultimately topped within 0.6 points of the target, and in retrospect it’s logical to infer that the bear rally may be spent. This means the dollar’s major trend will likely be down for the foreseeable future.  There is one caveat that should be noted, however:  If and when speculators test the Fed’s ostensibly unlimited bid for Treasurys, creating a long squeeze on U.S. bonds, this could cause the dollar to spike. The reason is that dollars will be temporarily shifting out of vehicles that are heavily leveraged as collateral and into hard-cash liquidity.