Options Trader: Friday Morning Ideas

by: Philip Davis
"It was a wishy washy day on the markets but we took the opportunity to lighten up on a few calls while entering some more oil puts (so far, so bad!)."

That was what I said at the end of Thursday, Feb 22nd. It was right after the Tuesday contract rollover, and oil had gone up and smoked our March oil puts. Things looked generally bright and, although I was bearish at the time and we had closed out a large number of calls for the week, we were still looking hopefully upward even though oil had just broken back above $61.

We had no idea it would take a single word on Monday to take down the markets when Dr. Greenspan said "recession." Actually, nothing happened ON Monday. But by Tuesday -- well we all know that story. Because we went into that weekend bearish, it was one of the best weeks we had in the markets, but I think right now we may be in the throes of end-of-quarter window dressing by the funds, and that may mean we have 7 days of shenanigans ahead (or we may be in a genuine recovery -- I am trying to keep an open mind about this).

SP 23 03 2007Still, things were great that day and here's the levels from that time with today's updates in brackets:

I think one of the things that made me a better trader was keeping a journal of what was happening when I made trades so I could analyze -- not just the trade I made but the factors that surrounded my decision at the time. This week has been killing me, but none of the fundamental factors that led to my decisions have changed, so I'm going to stick to my guns until we get a breakout one way or another.

Don't forget we went with covers in order to protect a VERY positive-biased short-term portfolio (not to mention the long-term portfolio) rather than dump our positions in panic, and they are rebounding quite nicely but still behind. What we REALLY don't want is to finish the option period right here -- exactly in between our protection and our targets. But we still have four weeks of trading ahead of us, and that would be one heck of an option pinning if it starts now!

Asia was basically flat. Europe is flat. So it's all up to us to give the world direction today. Most likely we'll just punt ahead of the weekend and stay flat ourselves, but I'm saying this at 7am on my way to a breakfast meeting so let me know how it all turns out...

Why is the Royal Bank of Scotland (the quicksand ads) shuffling executives in its "underperforming" U.S. unit. While I don't think we'll be seeing the bank on the Implode-O-Meter any time soon, I will point out that we started tracking this index of failed mortgage lenders when it was in the teens back in January and the count is now up to 44, up 13 since we talked about it on the 5th, not even 3 weeks ago. How long can we keep losing four lenders a week before someone admits there's a problem?

Remember like two days ago when I said I'd try to be more positive? It's not working here because MANY people in Washington think we have a serious problem but, like us, they don't buy enough ads on CNBC or other MSM to get their message out. Here's a sobering take on the situation from the Wall Street Examiner though. So sobering that I might suggest we all start drinking heavily...

Also from back a month ago -- here's the oil report that led to the last failed run at $62:

"We had a big drawdown in gasoline (3.1Mb) and distillates (5Mb) that offset a 3.7Mb build in crude and oil touched $61.25 during the day before falling back to $60.85. Despite the rally, I decided to peg small entry positions off our watch list in several of our target companies, perhaps we'll get a better entry on our next rounds but I didn't mind buying April and May puts at these prices."

We all know how that worked out for them, as oil closed this contract session at $57, and our relentless shorting finally paid off. I'm not suggesting we go overboard just yet -- just saying we may want to hold onto those puts and employ our covers to hold on.

Gold was $681 back on 2/23, and oil was right were it is now. But here's an interesting tidbit -- the NYMEX barrel count is SIGNIFICANTLY higher already than it was then. Let's not forget that they only ended up taking delivery of 27Mb of oil at Tuesday's close:

  • Front month then (April): 340M barrels open -- Front month now (May): 381Mb
  • Next contract (May) then: 127M barrels open -- Next month now (June): 152Mb
  • Next contract (June) then: 103M barrels open -- Next month now (July): 64Mb

So the barrel count is roughly the same, but they jammed up the front month to make it seem like there's some sort of demand, even though we all know they can't possibly take delivery of more that about 40M barrels in Cushing in a single month -- BRILLIANT!

Like I said earlier in the week, it's a beautiful thing when 100 guys can determine the price of oil for the other 5.9999999B of us. Thank goodness we can trust the free markets to arrive at a fair and honest price for our second most critical natural resource (and they are working very hard to privatize water too!).

Gosh -- someone should go to Washington and do something about this...

Well, I'm off to a meeting -- see you all in the afternoon!

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