Diamonds

We are short the August 102/August 98 put spread in a 1:2 ratio three times @ 0.76.  It's time to write off the likely trading loss of $228, even though we'll continue to carry the position toward expiration. In retrospect, the loss came from my having missed exiting some long puts on July 7. We had a profit of nearly $1000 in the position at one time and I should have suggested nailing some of it down. Indeed, there will never be a good excuse for not taking at least a partial profit when puts "come home" as they did for us, however briefly (which in the world of put options means three days, tops).

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

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.

Were bulls saved by the bell?  By my lights, the Diamonds were on their way down to at least 96.13, or possibly even 95.42, when yesterday's session ended.  If so and the lower number is approached, that would bring our short offer of four July 90 puts within range. Time decay has pushed down their value since I first suggested offering the puts for 1.40, however, and they would now be worth closer to 1.00 if the underlying vehicle hits 95.42 by week's end.  Accordingly, I'll suggest lowering the short offer to 0.95, with 0.10 of discretion. The important thing is to short them irrespective of their price if and when DIA gets near  95.42.  We continue to hold two August 98 puts for 1.06 and four July 96 puts for 0.70.  I've included a snapshot of the calculator I used to determine a fair value for the puts.  The 37.5 volatility comes from TradeStation. _______ UPDATE (Friday, July 2):  DIA fell to 96.17 today -- four ticks from the projected low -- setting up the obligatory pre-holiday bounce/waft.  Although there is zero buying interest other than very feeble short-covering, sellers still lack the inspiration and/or moxie to effect a washout.  The 95.42 target is still valid, but bears should be cautious about the rally threat because of the precise bounce that has occurred from our first target.

Our small put position is showing a theoretical gain of about $890 following yesterday's refreshing plunge in the broad averages. We hold two August 98 puts for 1.06 and four July 96 puts for 0.70; they closed, respectively, at 1.54 and 3.85.  We should be encouraged by the latter number, since the puts magically traded down to 3.85 after having been as high as 4.15 minutes earlier. What that means is that the thieving dirtbags who are short them -- professional market makers, like I used to be -- are struggling to hold them down.  They may have been "marked" at 3.85 for settlement purposes, but you can bet there weren't many for sale at that price and that the market makers would have jumped on any serious offers at 3.90 or even 3.95. They project to at least 5.00 right now (see chart), implying that sellers are not yet finished with the Diamonds/DJIA.

We hold two August 98 puts for 1.06 and four July 96 puts for 0.70.  Continue to offer four July 90 puts short for 1.40, good-till-canceled. The order is a longshot bet at the moment, but it could fill in a trice if a long squeeze develops before or immediately after the July 4 holiday. A dip below 101.29 in the early going this morning would be an encouraging sign.

A little greed is good here, since we don't want to sell our puts prematurely, just as the party as getting under way. We hold two August 98 puts for 1.06 and four July 96 puts for 0.70. The paper gain on the position at yesterday's closing prices amounts to a little more than $400. Continue to offer four July 90 puts short for 1.40, good-till-canceled. If you want to see how far DIA would have to fall to get us filled on the order, check out the accompanying chart.