Lower Open; Volatile Expiration Ahead?

Interest rate futures are weaker again, partly in response to the stronger than
expected PPI numbers ( +1.1% versus an expected +0.2%, +0.5% versus an expected
+0.2%, ex food and energy), but also in anticipation of another round of asset
reallocation into equities. The Edward Scissorhands-like execution of these
asset allocations has really caused the volatility to explode in the interest
rate futures markets, I hope my friends on the CBOT and CME are cashing in. The
dollar is a shade higher against the major foreign currencies, oil is a tad
higher, and gold futures are $1.30 better on the offer.

Industrial Production just came in worse than expected, -0.8% versus an expected
-0.3%, and Capacity Utilization came in at 75.2% versus an expected 75.6%. This
is causing further slippage in the futures. The big enchilada will be the
Michigan Sentiment numbers at 08:45 CST with an expectation of 82.0. Remember
that the market rallied most of the month of October, so don’t be surprised if
it surprises on the upside.

Remember, it is expiration day, which can make things quite volatile, and don’t
be surprised if we have a weak morning followed by an afternoon “mystery” ramp
job. If the market gets hit this morning, I’ll be sniffing for some cheap ($.10
-.15) November calls for a punt.

Volatility

To me, the really big news in the market yesterday was the decimation
of two fear sectors: The bond market and volatility. The bond market got
annihilated yesterday, and so did volatility. I thought vol might hold up into
the DELL number, but it looks as though premium sellers wanted to beat the rush
as we head into a seasonal decline. The VIX was crushed, losing 3.68 points to
32.60, the VXN lost 2.06 to 52.40, and the QQV lost 1.98 to 44.51. Is vol cheap?
Not yet, and not this time of year.

Update: (11/14/02)

DIA — We sold half of our November 80/84/85/89 call condors at $3.10
synthetically. (See the explanation in the Alerts! from this morning.)

KSS — Close, but no cigar.

New Recommendations

DIA — Sell the remainder of the November 80/84/85/89 call condor at
$3.50. I’ll give you another way to skin this cat tomorrow!

KSS — Buy another 25% of the January 50/60 put spread at $2.00.

Working Orders (Old Recommendations)

CIEN — Buy the January 2.5 puts at $.05 to close.

WAG — Sell  half the January 30/35 put spread at $3.00, half at $4.00 to close.

QQQ — Subscribers short the January 23/26 call spread at $1.50 (25%), leave an
order in the market to purchase the spread at $1.50 to close the trade.

Buy-writes

HAL — Long the January 15 buy-write at $12.05 (100%).

Proxy buy-writes

DYN — Long the January 15 calls at $3.20 — left over from proxy buy-write
(50%). Left for dead.

Complex Strategies

None.

Call Spread Positions

BGEN — Long the January 40/45 call spread at $1.00 (25%).

DIA — Long the November 80/84/85/89 call condor at $1.50 (25%). Sold
half at $3.10, 11/14/02.

DIA — Long the December 80/84/86/90 call condor at $1.20 (25%).

QQQ — Short the January 23/26 call spread at $1.50 (25%).

Put Positions

None.

Put Spread Positions

BAC — Long the January 60/70 put spread at $2.90 (25%).

KSS — Long the January 50/60 put spread at $3.00 (25%).

WAG — Long the January 30/35 put spread at $1.00 (50%).