A glum day on Wall Street, for sure, though not necessarily for Rick’s Picks subscribers. We went bottom-fishing against the trend in the mini-Dow futures, catching what turned out to be the best rally of the day. Using a three-tick stop loss, we put $30 at risk, theoretically, when we attempted to bottom-fish a hidden pivot at 10375. That turned out to be the exact low of a 31-point bounce, allowing us to exit within five ticks of the high, reaping a $310 profit in the process. We had placed another bid for a September mini-S&P contract, but it got timed out because the order was specified as night-session only. Good thing, too, since, after the opening bell the S&P came down somewhat harder than the Dow, mulching the hidden-pivot support I’d flagged on first contact.

It’s too early to say whether the bearish sentiments broached here on Friday – “Stocks Look Primed to Fall” -- will pan out, but we needn’t speculate, since I’ve provided a specific price for the S&P futures beneath which the bull would be in serious jeopardy. Meanwhile, a subscriber wrote to ask whether Da Boyz might try to peg the QQQ at 39, laying waste to the August 39-40 option strangles for which we paid 0.70 last week. What’s making him nervous is that the open interest for August puts at the 39 strike is relatively high.

Weasels

Under the circumstances, one might infer that the professional weasels who short out-of-the-money puts and calls to finance their princely lifestyles would never tolerate such niggling discomfort as a dip below 39 might evince during expiration week. My gut feeling is that the forces weighing on the market right now are about to wax, and that attempts to prop up the averages in order to keep puts from exploding are therefore likely to fail. This is not to say the August 39 QQQ puts are guaranteed or even likely to finish in-the-money – only that they seem primed to turn nasty for a few days at least, before the obligatory short-squeeze just prior to expiration turns them docile once again.

Any retail customer with a jones for puts knows that the patient bear will rarely have more than a day or two to take profits in the unlikely event they should manifest themselves, and that, moreover, the implied, fleeting gains will almost never exceed whatever sum one has squandered shorting stocks in years past. Take heart, though, for perhaps the day will yet come when puts go bonkers as they did in October 1987. That is why it is nearly always advisable to hold onto some puts after taking partial gains sufficient to zero out their cost. And of course, a couple of those puts should be held back for the six sigma event that few on The Street would deign to predict. Any more sigmas than that, however, and we may be wishing we’d stockpiled canned food and bottled water, not put options.