That was our worst day in a long time!
We didn’t do anything different, the market didn’t really do anything different (it just kept going down) but a combination of the VIX climbing to 31 and a long-term sentiment shift turning down caused our long/short spreads to get out of whack and LOOK bad. Looks can be deceiving however…
The high VIX levels pump up the short calls we sold but the fact of their pending expiration remains absolute. Our first order of business yesterday (my opening call for members at 9:27) was to cover our longs and "Sell any Novembers that give you a nice premium for the week, set stops on them and roll to December if you have to." When the volatility is out of control and you are being offered (for example) $1.75 for the XLE energy spider when that is 15 cents out of the money with just 4 days left to trade – you take it!
Sure the XLE can snap right back up $2 tomorrow and another $2 and even another $2 but, if you have, say the Jan $71s for $4.72 you should be happy to give him back $5 with the XLE finishing Friday at $76 as you would be $5 in the money and looking to sell the December $76s for $4. That would mean you have collected (assuming this was your first sale) $5.75 against your $4.72 position and yes, you gave back $5 of it but now you are $5 in the money, whereas before you were out of the money. The value of a $5 in the money XLE Jan $66 is $7.92 – that’s where your profit is!
It is very difficult to get used to the idea of "banking" your gains, many option players who are used to directional trades tend to panic when they sell calls because they identify more with the caller than they do with their longer positions, which seem remote and unreal compared to (in the XLE example) the very real $3 "loss" they take when the caller goes deeply in the money.
This prevents traders from doing the right thing like rolling a GOOG March $700 call (now $33.75, down from $55 on Friday) to the March $640 for $25. If you bought in at $55 on Friday you would effectively be spending a total of $70 for the position (now $58.05) but what people fail to realize is that the $640 was $80 on Friday and has a hell of a lot better chance of making a comeback than the $700 does. IF YOU DON’T LIKE A POSITION ENOUGH TO PUT MORE MONEY INTO IT – GET OUT! Aside from the sensible repositioning, I can follow that roll by selling the Dec $660s for $21.55, paying for most of my roll selling a $20 off my mark position whereas selling the Dec $700s would net me just $9.60.
This is why our strategy since Thursday has been to buy long (we’ve been going with ’09s), scaling in as needed and rolling ourselves down whenever we got a good deal. If the market is going to bounce (and I’ve been saying 13,000 very publically so it better!) then we will have ourselves a VERY nice virtual portfolio of new positions, especially great stocks, like Google that we thought had gotten away from us. If the market continues to go down – well, we’ve already discussed in member chat that I would be thrilled to own the GOOG ’09 $500s for $150 if I end up having to roll that far!
From this morning’s big chart, we did finish below 13,000, at 12,967 but I’m willing to give one mulligan as the NYSE is still over 9,400 and the Nasdaq, though looking pathetic, is still in our comfort zone. If we lose the Nasdaq I will become concerned (2,550) but this is what a sector rotation is supposed to be like, especially when the sectors being rotated out of are energy and financials, perhaps 40% of the market. My other running theory for yesterday is that we had a lot of ETrade accounts selling off as Citibank caused widespread panic by waving the bankruptcy plan at the already beleaguered broker.
Somehow Citibank feels that ETrade’s $3Bn asset-backed virtual portfolio (which has already been written down 8%) will have to be written down by $5Bn but don’t try to confuse this market with facts. We were prepped to sell first and question the motives of a rival trading firm’s analysts later and C timed their hatchet job to perfection as yesterday was a bank holiday and you couldn’t take your money out of ETrade if you wanted to (no wires, no certified checks).
There are no writedowns to be suffered by ETrade that CitiBank won’t suffer as well and while it is valid to be concerned (always make sure you don’t have more cash in your account than you feel comfortable with the institution delivering back to you!), the only thing that can really cause a run on Etrade would be a run on Etrade – exactly what CitiBank seems like they are trying to start as they light a torch and rally the villagers to storm the castle (where they hope to poach some of the $15Bn worth of HNW accounts that ETrade has).
We’ll see if the story has legs but we did a ‘mon back on the Jan ’09 $5s for $1.50 on the off-chance their rivals can’t drive them out of business! As to the markets, we’re hoping to find a floor here but, until we do, it’s more:
"Rollin’ rollin’ rollin‘
Though the streams are swollen
Keep them doggies rolling
Rawhide
Keep movin’ movin’ movin’
Though their disapprovin’
Keep them doggies moving
Rawhide
Dont try to understand them
Just rope, throw and brand them
Soon well be living high and wide
All the things I’m missin’
Good victuals, love and kissin’
Are waiting at the end of my ride
Cut em out (ride em in)
Ride em in (cut em out)
Cut em out (ride em in)
Rawhide!"
