Options Trader: Tuesday Wrapup

by: Philip Davis

Wow, what a busy week so far!

We’ve been day trading a lot so there’s been a ton of activity and, of course, my call to take 25% of our callers off the table on Monday was followed by a note to members yesterday to do more of the same as I said:

• Posted October 2, 2007 at 10:11 am | Permalink
o Pending home sales lowest EVER down 6.5% from last month, down 21.5% from last year - Will it matter?? It’s old news but stunningly bad. o No sense in not stopping out of winning plays - lots of things to buy with cash! XXX
• Posted October 2, 2007 at 12:35 pm | Permalink
o Today is a gift for repositioning more bullish. Able to buy out some callers a little lower than yesterday and choose new covers with care (although I still love the FXI puts).

All in all 53 positions have already come off the table, about the same as all of last week and it’s only Tuesday! We’re moving back towards cash as the market looks tricky and we’ve been playing for a pullback at 14,000 for over a week so it would be just lovely if it actually happens.

The gist of our strategy shift was to let more of our longer calls run naked by removing the covers (as discussed Monday) in case the market really wants to go to the moon, and shifting our downside protection more to the DIA and FXI index puts as we expect a nice, sharp pullback at some point. We’ve been chasing the FXI up over 2,000 points now but today was the first time I’ve left that put naked, previously we had sold $8 lower October calls against it to pay for the rolls…

We now have naked calls as 24 of 59 open positions in the STP along with 20 naked calls in the LTP and some in various other portfolios, a huge shift from our heavily covered set going into the weekend. We will maintain normal stops on these, especially the Oct/Nov winning positions but they are very well protected by 700 DIA puts that we removed the covers on (those positions are our biggest losers) as well as a nice block of Jan FXI puts, now all the way at $185. There are only 200 QQQQ calls as a general upside play so we’ll have to keep on our toes if the market flies up on us but the general play we’re looking for is a nice dip that will test our levels (see this morning), hopefully followed by a rally to new highs.

The purpose of the index puts is not to make money, although that happens by accident sometimes. The index puts are there to give us time, in a dip, to calmly evaluate our open positions so we can decide, item by item, whether to Stop (take it off the table), Drop (drop our option to a lower strike) or Roll (move our calls to a lower strike or farther out in time).

Tomorrow should be very interesting, I can’t believe it’s only Tuesday!