How to trade Freakout Friday

  • October 7, 2005
  • Joe Corona

What You Want If…

Today we have the non-farm payroll report (“unenjoyment”
as we used to call it on the floor), an early closing in the bond market, and
the stock market is hanging by a thread. Volatility has been screaming the last
couple of days, albeit from a low level, and it is shaping up to be a “Freakout
Friday.”


VIX

SPX

I love it when economic reports are released
because it forces everyone to make a move.

The number will have come and gone by the time the stocks open, but here is your
“wish list”:

If You Are Bullish…

You want a horrible number, the worst! You want
the market to gap below yesterday’s lows on huge volume. You want the sellers
who are above this market, and the longs that have been holding on to pull the
trigger and sell. You want the market to rally back into yesterday’s range and
baboom! The sellers are trapped and the market roars:

Bullish Scenario:

If You Are Bearish…

You want a fantastically bullish number, one that
causes some short covering and takes the market right up into overhead
resistance and backs volatility down a bit. Then you want it to hover while you
reel in some puts. Then it gets smoked late in the day and takes out the lows
(this is the one I like):

Bearish Scenario:

For option traders, on a gap opening lower
initiate some bull spreads and use the rally to “morph” them into ratio spreads
to take advantage of the current high volatility levels. On a gap opening
higher, buy puts, and use the sell off later to sell further out-of-the-money
puts (at what will then be higher volatilities) to “morph” the position into a
bear spread.

Enjoy!

Joe Corona

Joe Corona is a 23-year veteran trader who makes his living
trading options
and other derivatives. Mr. Corona has been a floor trader on numerous exchanges

including the CBOE, CBOT, and CME. Joe most recently spent 4 years as Head
Trader for Market Wizard Tony Saliba at Salibaco, a proprietary trading firm. He

has also been an options instructor for the International Trading Institute
where he has trained hundreds of options and derivative traders for major
institutional trading desks worldwide. Joe is the Director of the Asia Pacific

region for CDLS Consulting, LLC which specializes in trading U.S., European, and

Asian options and derivatives.