Call Buyers Spring From Behind Bunker

Well,
another one bites the dust.

Big psychological barriers, that is.
Two days ago the Nasdaq blew through 2000, and today the Dow plunged
through 10,000. This is a Bear market,
folks, both technically from a classical standpoint and from a sentiment
viewpoint. As options traders, we (in this column) have been lulled to sleep by
the orderly moves to the downside. I had not given any warning signs, save three
weeks ago with the markets a lot higher, when I got that puke-gut feeling and
said so here.

We have been
Bearish here at the home front for the past few weeks, but have failed to pass
that on to you. Hell, Joe has had the “We Are in a Bear Market” sign up on
his trading station since October 2. I stare at it and say, “you betcha,”
but have not generally jumped on his wagon in this space. Mea
culpa, mea culpa, mea maxima culpa
. 

But it’s not my
place to call markets, I’m not a timer, I’m an optimizer… looking for the
best risk/reward for any given idea. Generating ideas: Well,
we can share that role.

Still there is a
lot of room on either side to move. We need to know about bear markets and how
act accordingly. Although a goodly share of the major tech stocks have seen
their value swirl down the drain, the big names aren’t going straight to zero.
But will they bounce? And how to play them if they don’t?

As you know, they
don’t ring the bell at the bottom. And they probably don’t go straight up
from there, either. Action like yesterday has covering, bottom pickers and
general momentum folks (what’s left of them) buying stuff up for a bit. But in
general, we could go sideways for a while. Look to transact butterflies in these
markets. We will get trading ranges that could make nimble stock traders some
good dough, but for me, I’m going to be on the lookout for some wide
“butters”.

This morning,
options practitioners are reacting in a schizophrenic fashion. Pre-bell they
were buying puts and selling calls… pretty much what they have been doing for
at least the past 3 months. After the first hour, however, call buyers had
emerged strong as had put sellers, marking a reversal in trend. 
Order flow remains light, registering a 1.4 on a scale of 1.0 to 10.0,
with 2.1 being our 30 day moving average. Volatility has spiked, commensurate
with the downward spiraling market. 

A glimpse at our
search engines reveals the “heaviest” (note the quotation marks!) activity
to be in the techs, where call selling especially predominates. 
We note some unusual activity in
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,
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, where call sellers
are out in force; and in
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where a small cadre of call buyers has jumped
into the fray.

A glance at our
open “Softie” spreads reveals that we’ve lost ground, as would be expected
given the huge smack
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has taken over the past week:

The
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April 60/65 Call vertical is trading $.13/16 to $ 1, (recall we got in
at $1 13/16) and the MSQ April 55/65 call vertical is trading at $ 3 1/16 to $3
5/16. (Recall we got in at $4 11/16).  
MSFT stock is currently at 54 ¾, thus

we are down
about 80 cents on the 60/65 and
about a buck 30 on the 55/65, while the stock is off 3 ½ plus.



Our
next suggested spread idea will reflect a new stance






Here are
today’s numbers…

Pre-open
order volume was light this morning.  Overall,
call sellers led buyers at 3:2, while put buyers beat out sellers at 3:2. 
In pre-bell activity,
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call sellers outnumber buyers 2:1. 

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call sellers showed up leading buyers 4:1. 
MOT call buyers dominated sellers 3:1. 

(
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call sellers led buyers 4:1.  EMC
call buyers outnumber sellers 2:1.



First
hour order volume was light this morning. Overall, call buyers led sellers at
3:2, while put sellers beat out buyers at 3:2.  In first hour activity,
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call sellers outnumber buyers 5:1. 

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call buyers showed up leading sellers 2:1. 

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call buyers dominated sellers 3:1.  

(
IBM |
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call sellers led buyers 2:1. 

(
EMC |
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call buyers outnumber sellers 2:1.



Volatility
has popped up, and at best period spikes in the market will occur.

Butterfly
spreads are the strategy of choice in this kind of market, with higher vols
brings their prices in. Actually, Butterflies happen to be my forte, 
I have used them time and again to my advantage over the years.
I will pass on what I can…



Our
engines are on and searching for juicy fruit, but with the collapsing market
conditions that we are experiencing, these are not good times to initiate new
plays.  In other words, stand down
and batten the hatches….


Keep on writing me
and I’ll answer at tonys@tradingmarkets.com