Here It Is! The Capitulation Phase — What’s The Plan?
This is what we have been expecting/waiting for. The WorldCom
announcement last night regarding $3.8B in fraud and the firing of its CFO has
rocked the market. Right now the stock is trading at $.11! It will be
interesting to see how many other companies use the WCOM announcement as cover
to slip in their own negative announcements today. The cockroaches are really
starting to run. Currently, DJI futures are 209 points lower, S&P futures
are 23.00 points lower, Nasdaq 100 futures are 39.50 lower. (The Russell 2000
futures are about 6.0 points lower, and if any “safe haven” types
decide to push that higher today, I’m going to be on it like white on rice.)
We have some short-dated option positions (July) that we should
probably take some partial profits on. First and foremost, we are long the DJX
July 90/96 put spread from $2.00 (25%). Last night it settled at $3.50. It
should open substantially higher this morning, and I think you should take
profits on half immediately. If the DJI closes below 9000, there really is no
support until 8000, so hold the balance. If the DJI closes higher on the day
today, liquidate the remaining DJX put spreads!
We are long the BAC August 70 puts from $2.60 (100%). Last night they settled at
about $3.10. Sell half of the position out at $5.00, hold the balance.
We are long the Merrill
PowerRating) July 37.5 puts at $1.40 (25%). Last night they
settled at about $1.25. Sell half at $2.50 or better. If the markets close
higher on the day, we will want to liquidate all July bear positions!
If the market goes completely manic in terms of price and volatility, we might
also liquidate some longer-term put positions as well.
Get your orders in early (before the open) for all of these positions!
The dollar is getting crucified. I took a peek at some of my short-term
European bond funds (mentioned here two months ago) that I jumped into in April
and they are up over 11% — not too shabby! This dollar weakness is really out
of control and has stopped the Japanese recovery in its tracks. That is why the
BoJ is furiously intervening to buy dollars. This morning the BoJ bought dollars
at Y120.16 and Y120.55. There are reportedly huge sell stops below Y120.
On The Side…
The next not-a-stock trade I will give you is this: For those sitting
on some cash and with futures accounts open, start buying some long-dated puts
on U.S. Treasury Bond futures (traded on the Chicago Board of Trade). When the
stock market finally collapses to wherever it is going, bonds will also
The Plunge Protection Team…
Yes, Virginia, it does exist, and the FOMC is meeting today. Remember that the
Fed long ago abandoned their original mandate to provide a stable currency and
is now at the beck and call of Wall Street. Same for the Treasury Department.
Don’t be surprised if a futures-driven “mystery rally” were to appear
— another good reason to take partial profits.
Just when you think it’s dead…Volatility roared back from the morning lows
with the VIX gaining 1.60 to 31.47, the VXN gaining 1.23 to 59.88, and the QQV
gaining .99 to 52.12.Volatility is cranked and it should explode today, another
reason to be ready to take partial profits on puts.
For those who are bullish, or thinking about getting bullish, volatility is
marked up so high that on any rally, collapsing volatility might offset any
profit to be had buying calls. Vertical spreads, or for those who can manage it
margin-wise, ratio spreads (IV #57) would be the preferred option vehicle for an
intermediate rally play.
Trade Updates (6/25/02)
New Actions (New Recommendations)
DJX — Sell half of the July 90/96 put spreads on the opening. If the DJI closes
higher on the day, sell the remaining spreads.
Working Orders (Old Recommendations)
PowerRating) — Holders of the DYN January 15 call/June 20 call proxy
buy-write (long the JanuaryÂ 15 calls, short the June 20 calls at $3.20),
buy the JuneÂ 15 calls (to open) and sell the September 17.5 calls (to open)
for $1.00 credit (to you).
Recap of open trades
AOL — Long the October 20 buy-write at $16.30
CHIR – Long the July 50 calls at $3.30 (50%).
Call Spread Positions
DJX — Long the July 90/96 put spread at $2.00 (25%).
- Options trading involves substantial risk and
is not suitable for all Investors.
- Also note that spread strategies involve
multiple commissions and are not risk-free. Most spreads must be done in a
- Because of the importance of tax
considerations to all options transactions, the investor considering options
should consult with a tax advisor as to how taxes may affect the outcome of
contemplated options transactions.
- Supporting documentation for claims,
comparisons, recommendations, statistics or other technical data will be
furnished upon request. One or more of the contributors to these
commentaries may have a position in one or more of the securities mentioned.