Melt Up In Volatility May Be Over

  • December 9, 2002
  • Tony Saliba

UAL files Chapter 11 — no big shock there, but
some downgrades of key names have the futures on the defensive early this
morning. IBM, Emulex (ELX) and Qualcomm (QCOM) all received downgrades this
morning. Currently, DJI futures are down  81.0 points, S&P futures are 8.60
lower, and Nasdaq 100 futures are 12.00 lower. In Europe, the FTSE 100 is down
 48.90 points or 1.22%, the DAX is off by 60.00 points or 1.87%, and the CAC 40
is down 35.35 points or 1.11%. In Asia, the Nikkei dropped 35.21 points or .40%,
and the Hang Seng fell by 105.27 points or 1.06%. Interest rate futures are
slightly higher this morning (yields lower), the dollar is mixed, crude futures
are about $.40 better, while gold futures are unchanged.

The United bankruptcy will get all the squawk today, but this has been
discounted for a long time and will have virtually no impact. Lackluster sales
over the weekend at many retailers is more likely to have an impact today, as
will the downgrades. All in all, I would say that it looks like we are going
into a pre-Christmas chop, with a neutral bias. Watch volatility for hints as to
market direction, and keep it light.

Volatility

Friday volatility took its rightful Friday post-number beating, with
the VIX dropping 1.60 to 32.68, the VXN fell 1.88 to 52.28, and the QQV lost
2.62 to 43.71. I think the little melt-up that volatility has enjoyed since
Thanksgiving might be over.

Those Boxes…

A couple of readers have suggested that I list
the boxes (vertical spread trades where we liquidated using synthetic
equivalents) under open positions, so I have listed the BGEN box under “Complex
Strategies” (below).

Update: (12/06/02)

CIEN — Close but no cigar, re-enter Monday

HD — We bought the January 25 calls at $2.00 (25%) right on the open.

New Recommendations

CIEN — Sell the entire January 5/7.5 call spread at $1.05 (to close).

Working Orders (Old Recommendations)

HD — Buy the January 25 calls at $2.00 or better (25%).
Filled!

KSS — Sell half of our January 50/60 put spreads at $5.00 (to close).

PG — Buy the April 75/85 put spread at $2.50 (25%).

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.

Recap of open trades

Long-term

Reverse Collars

None.

Buy-writes

None.

Proxy buy-writes

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

Complex Strategies

BGEN — Long the January 40/45 box (25%).

Directional Positions

None.

Short-term

Call Positions

GILD — Long the January 40 calls at an average price of $1.60 (50%).

HD — Long the January 25 calls at $2.00 (25%).

Call Spread Positions

CIEN — Long the January 5/7.5 call spread at $.05 (25%).

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 $2.475 (50%).

Stops

GILD — $34.50 closing only.

KSS — Two consecutive closes over $74.00.