Options Trader: Monday Wrapup

by: Philip Davis

Clearly we are being left in the dust by this runaway market!

The train has now left the station and all we can do is grab the bumper and hold on tight because it looks like it’s going to be a wild ride… Bad news is good news and today’s rally, led to a lot of short covering that drove the Dow to a new all-time high with strength from open ’till close.

Can it last? Well, it shouldn’t be happening now but it is so if we can’t accept it we’re kind of like those people who saw a plane for the first time and say "I can’t believe it’s flying." Then they watched it and said "It can’t possibly fly" as it continues to go up, then they say "It’ll crash," but it doesn’t and then it’s gone and they still can’t believe it.

As with an airplane, just because you don’t understand exactly how something works doesn’t mean you should refuse to get on!

I’ve said before, I learned my lesson in 1998 as I watched bear after bear after bear go broke betting the market couldn’t gain another 100 points. In the past 2 years, betting against the Hang Seng has been suicide and the big rewards went to those who would double down on the dips. I don’t advocate throwing it all to the wind and buying everything that’s not nailed down (those bears were right in 1998, the Nasdaq was way overpriced and Yahoo wasn’t worth $400 a share!) but, as long as the rally is determined to keep going there are plenty of laggards we can pick up in each sector.

We took a half step towards believing yesterday as we removed 25% of our covers (keeping stops on the exposed 25%) as the day went pretty much exactly as expected when I said in the morning: "At home we’re going to keep our eyes on the SOX at 500, the XLF at $34.50, the Dow at 13,900, the Nasdaq at 2,700 and the S&P at 1,530. If we can hold these levels on at least 3 of the 5 indexes, it may be time to lift up some of our covers (perhaps a 25% reduce) as this (bank confessions) was one of the major body blows we were expecting and if the markets can shrug this off, I know more than a few bears who will be throwing in the towel and say "I have no idea what’s going on."

Assuming nothing blows up this evening we’re going to roll what sad little DIA puts we have to the November $140s and sell some other poor guy the Oct $140s to begin to recoup some of our lost premium and we’ll manage the downturn by placing stops on the putter but our leaps and other spreads are so far in the money they no longer need much protecting as our callers provide a more than adequate buffer to the downside.

Now we have some nice new levels we can keep our eye on, the same one’s we blew through yesterday! Above that line for the indexes and we can pretty much begin to target the laggards with good fundamentals (like our SYX play and today’s RSTO) as more stocks capitulate and join the rally. There is one overriding danger that we must keep our eye on and that’s — THE DOLLAR! Yes, that same dollar whose total collapse sparked this rally may turn around at any time and bite us in the ass as our "strong" markets make our weak currency look like a bargain. This is why we are shifting our primary short focus to the oil sector, the most overbought segment of the market - if fundamentals start to matter, XOM’s $520Bn market cap may be hard to sustain as their forward p/e is pushing 14 and I’m predicting LOWER earnings this quarter compared to last year due to a much tighter crack spread at the refining operation.

For those of you playing along at home, those 20,000 Oct $90 puts, now .70 are ours and, with earnings coming after expiration, we’ll be rolling to the November puts on the next dip. If they beat us, that’s fine, as we are hedging a much more bullish portfolio with the sector most likely to collapse first and we are also going to continue to chase the FXI as they are going to melt down with style - but not today!

So we’ll shop ’till the market drops, keeping our eye out for potential bumps in the road as we have the Briefing.com Economic Calendar showing us what’s ahead but, after this week, it’s earnings season, and that’s a world unto itself, kicked off in earnest with AA on Oct 9th.

Of this data set, only non-farm payrolls is a big concern, and the revisions can be all over the place. Whatever the numbers on Friday, they may be used as an excuse for profit taking ahead of earnings and we’ll re-up our put count to carry us through this, and most other weekends but if we sustain our new levels, we’ll be rolling our portfolio over to a much more bullish stance for the next option period.