DIA

We added a short August 102 put to our position for 3.10, making us long six August 98 puts and short three August 102 puts for a net debit of 2.28.  On a delta basis, the position is nearly dead-neutral at current prices, but because it is a backspread, we’ll automatically get longer if DIA rises and shorter if DIA falls. For now, no position adjustment is necessary, but you should check this tout (or the chat room) for intraday updates, since a violent move could bring us opportunity.

With bears struggling to hold stocks down yesterday, we temporarily neutralized our short position just before stocks took off, selling two August 102 puts for 3.70 against six August 98 puts already held for an average 2.13.  This is a “backspread” position, and it will automatically make us longer if DIA goes up and shorter if DIA goes down. The tradeoff is that time decay will work against us, and that the position is a loser at expiration if the underlying vehicle is sitting near 98.  We have plenty of time to adjust, though, and the adjustment that will work best implies selling into strength and buying into weakness. For now, however, do nothing further. Wait till you see how much fun this can be if the Diamonds should turn violent! _______ UPDATE (2:48 p.m. EDT):  Short one more August 102 put for 3.10 or better. They are currently 3.10 bid with DIA trading 101.68. The resulting backspread — long six August 98 puts, short three August 102 puts — leaves us net short the equivalent of 24 shares, but we will automatically become long if DIA moves up just 20 or so cents from here. Our average cost per ratio spread is 76 cents (3.50 average per each August 102 versus 2.13 x 2 cost for the August 98s). This position will have to be worked to overcome the disadvantage of time decay and the prospect of a worst-case loss if the options expire with DIA trading around 98. One way to do this would be to short August 94 puts if DIA falls sometime in the next few weeks.  That would turn our vertical ratio spread into a butterfly yielding a profit, or at least no loss, over a wide price range. If DIA simply goes up, up, up, then our maximum loss would be what we paid for the spread, or $76 (x 3).  In practice it would not necessarily be that bad, however, since the August 98 puts are likely to hold premium (via increasing implied volatility of out-of-the-moneys) better than the August 102 puts that we are short.

We hold two August 98 puts for 1.06 and four July 96 puts for 0.70.  Close out the July puts if DIA exceeds 97.68, since that’s where the five-minute chart would turn ever-so-slightly menacing for bears.  Otherwise, we’ll continue to hold for a possible relapse down to the 95.42 target given here earlier.  If a rally makes it to 99.06, I’ll put out an advisory, since we’ll want to lay in some more August 98 puts on any ostentatious show of ”strength.” _______ UPDATE (9:41 a.m. EDT):  The market looks like hell, unable to capitalize on the feeble short squeeze that had developed overnight. Still, not wanting to take chances owning soon-to-expire puts into even a wafting uptrend, we sold the Julys for 0.97. Imputing the profit thereof to our cost basis for the August 98 puts brings them down to 0.52 apiece. Incidentally, the Diamonds made a tradable top at 99.08 early in the session before pulling back 47 cents.  You’d have to have caught the short on your own, however, since I was unfortunately too busy putting out fires at the time to publish a bulletin. _______ FURTHER UPDATE (1:19 p.m. EDT): DIA has gotten second wind as of this moment and is presumably headed toward a top equivalent to the one at 1149.25 that I’ve projected for the E-Mini S&P.   Since DIA has exceeded any target I can project for it today, I’ll suggest buying four more August 98 puts if and when the E-Mini S&Ps reach 1149.25. _______ FURTHER UPDATE (4:03 p.m.):  We bought four more puts as advised, for 2.65. This gives us an average price of 2.13 for the six now held. No further action is suggested at this time. _______ FURTHER UPDATE (1:13 p.m. EDT):  In the chat room, I’ve recommended shorting two August 102 puts for 3.70 against our position.

We continue to hold two August 98 puts for 1.06 and four July 96 puts for 0.70. Time decay is going to be start devouring our July puts this week, but we’ll give them perhaps one more day, since the 95.42 downside target in the underlying vehicle is still valid, and because I utterly lack the imagination to see how the Diamonds and E-Minis could possibly rally before they reach my bearish targets.  Granted, tonight’s obligatory, beginning-of-the-week short squeeze has reversed the Mini-S&P’s miseries by 16 points — the equivalent of a 130-point rally in the Dow — but I have my doubts there will be many more bears left to squeeze by the time the opening bell sounds on Tuesday morning.