Tuesday Top Off

That was so great!

I don't think we could have possibly had a better day.  Of course we were bearish last week but accumulating at the bottom was the right way to go as was selling calls to cover and rolling down, rather than stopping out of our banged-up long positions.  I made a really good bottom call for the members yesterday, with the Dow at 13,000 when I said: "I stand behind my flush theory after reading over GS comments that they absolutely not only mark to market but test the market for accuracy. While we may be held down for expiration I think there is going to be at least a round of buying in the near future so I’m putting my efforts into rolling down and loosening the covers (keeping a larger spread). If I’m wrong now, I’ll grab DIA puts as mo plays but I think we’re either testing real bottoms or at least ones that will hold for the week."

Of course this was just follow through from my premise of last week that we were moving into a lower trading range between 13,000 and 13,300 and we've been buying '09s on big names like AAPL, GOOG, ISRG, WMT, GS, etc since last Thursday so my timing wasn't perfect but, it doesn't have to be!  That's the whole point of this strategy – we don't have to catch every wave, a good one will come along often enough…

Today's move was perfect for us as we sold callers into a very high VIX, which inflated their value so, even as the markets jumped up today, we had all the time in the world to buy them back, often at no more than they paid us, as the collapsing VIX destoyed their premiums.  This is the reverse of the frustration you feel as an option buyer when your stock goes up but your call barely budges.  There is a proper time to buy and sell calls and, just like a surfer, you have to know the top of the wave from the bottom or you're not going to have a good ride.

It is very hard to adjust your thinking to spread trading, as I said to members Monday night: "It’s a very tough environment for any trading style. Our virtual portfolios (other than the STP where we keep the index puts) all took a hit today as well. A lot of it is paper losses of course as the angry VIX has pumped up our callers while long-term sentiment is taking down our leaps.  Pursuing a strategy of rolling down will only get us so far if we dive another 500 points and flatline at 12,500 for 6 months. I’ve been going over market scenarios all night, trying to find an optimum strategy and it’s very difficult as we are in an Asian-sized swing where we could go up or down 500-points at any time. There just wasn’t enough time in the day to roll all the positions down or roll the callers as this was just widespread market devastation."

As I mentioned in yesterday's wrap-up, our virtual portfolios took one of the worst hits of the year on Monday but it was all paper losses, the real danger is in reacting to those moves and turning paper losses into real ones by panicking.  Often new members ask why we don't just have a list of picks but I think this week has been a great example as being in a trade without understanding why you're in a trade is a very dangerous thing.  Options are not like stocks, you can't trade them solely on price and that's a very hard adjustment for people to make.

Our mid-day move on our GoogleFly play was a great example of this.  We took an iron butterfly last week with a target price of $680 (the point at which we max profits) and what seemed like a safe downside break even at $671.70.  Google, of course, fell all the way to $630 so we took out our $680 caller for a nice profit and rolled our own $690 calls down to the $670s, as I thought the sale was overdone.  This left us with naked $670 calls against the $680 puts we had sold for $18.80 and the $670 puts we had bought for $13.30. 

All that is perfectly natural, we beat our caller and took him out.  What was more difficult was the follow-up move yesterday as Google was heading up I tried to find a way to make some extra money.  Since we couldn't leave the putter naked (margin issues in the small virtual portfolio) we took advantage of the momentum by flipping the $680 puts over to the $650 puts.  While this seems like a painful change to make, what we did is take him from a $27 position that was $24 in the money to a position that was $10 of pure premium.  While we are still $1,735 behind on our position, there is now light at the end of the tunnel as we now have "ball control" as we are in a superior position, with our $670 puts, to our putter at $650. 

There is a risk, of course but I strongly felt that GOOG would top out at $660 and, of course, I do have a contingency plan, just in case!  As I told members yesterday, we don't have to win in the end, at any point in the week that we get even, we can pull the trigger an get out.  It's always good to play a game that you can quit while you're ahead and force everyone else to keep playing when you are behind!

We were very fortunate to have cash on the side and take advantage of this dip but we are not at all out of the woods.  If I'm right about our range, we will have to scramble to re-cover our long positions but, on the bright side, we should be doing so into a rising VIX, giving us good prices again!  Once we establish a proper channel then the real fun can begin but it's been way too dicey for us to mess around with directional picks this past week.

The dollar stopped improving yesterday and looked weak around 76 but I'd be more concerned if it shot right back to 78 so a little consolidation down here would be a good thing.  Gold held right at $799 and how it handles $800 is critical but I think the sell-off in the miners is way overdone.  Oil…  ROFL… Oh sorry, let me start again – Oil fell $3.32 yesterday costing December speculators $1Bn over at the NYMEX and $90 is right about the 10% rule from the high of $98.62 so we're not going to be very impressed with anything less than a move back over $92.50 tomorrow.

There is no oil inventory due to the holiday so we can hope for a nice BS rally in the energy sector to short into as they fell a little too fast for us to catch them last time.  Mr. Sparkle gave us the updated NYMEX chart and you can see that these guys never learn as the rollover crossing point has moved UP from 205,000 contracts (1,000 barrels per contract) on 9/14 to 280,000 contracts on October 8th to 310,000 contracts on November 12th:

What this chart reflects is the ever-expanding pile of BS that the NYMEX traders have to build in order to sustain the demand myth that is keeping the price of oil elevated way beyond anything that can be fundamentally justified.  Notice how they had to feign interest in 450M barrels of crude for December delivery, much higher than the 365M barrels they pretended to want in November (which they ultimately cancelled all but 38M barrels of causing a "shortage" of oil inventory this past month).

At some point, even for the rich criminals who orchestrate this con, it becomes too painful to take this monthly loss as they roll barrels over (yesterday alone was a $1Bn hit for holders of December contracts) and even the best con man knows when it's time to fold up the game and move to another town (I hear gold is ripe for pumping!).  The NYMEX crowd has been desperately holding on for a hurricane and now they are praying Bush can get some kind of war going soon but the pumper-in-chief is becoming a lamer and lamer duck and it's going to be hard to pick a fight with Iran when he can't even get more funding for his other two wars. 

With $90Bn worth of oil on the line, scheduled for NYMEX delivery that will never be accepted in Cushing (a facility that would take a 2 full years to actually process the 1Bn barrels of oil that are on order between now an February) every $1 that oil falls costs traders an aggregate of $1Bn.  It's a long way to $60 and $33Bn is a LOT of money to lose but, unlike the sub-prime losses which wreck lending institutions – no one is going to cry over these bankrupt speculators, who are costing the American people $600M a day ($219Bn/yr) as we pay that bogus $30 per barrel surcharge to feed their speculation.