The market is slightly higher at
the moment, but there are some interesting
Core CPI came in much higher than expected at +.4% vs.
.2%, not good. Although the
headlines will tell you about the dollar making a new high vs.
the yen, the important thing is that the dollar is getting pounded
vs. European currencies, not good.
With interest rates below the inflation rates, commodities
may become attractive alternative investments to stocks — just something to
keep in mind.
Yesterday, the market closed below several key technical
levels as well. There should be
another rally coming, however, on the possible capture/death
of bin Laden — look to liquidate longs into that rally.
Important levels to watch today:
As I’m sure you are all aware, two days ago, Calpine
PowerRating), along with
much of the energy production/natural gas sector, bottomed
on heavy volumes (6-10 x average) and astronomical implied volatilities.
We exited our buy-writes for a loss of 2.49. This was obviously
the wrong strategy for stocks with the current hysteria level of
this sector. You do not want to have a buy-write on when much of the
market believes that the stock could go to
However, for those who are not afraid to go back in the
water, there is another way to
play an oversold stock and high volatility without exposing
yourself to huge downside risk.
A call ratio spread is another way to approach these types
of markets. Since the implied
volatility will have a high negative correlation to stock
price (stock goes down, volatility goes up; stock goes up, volatility
goes down), a call ratio spread will take advantage of the declining
volatility that will accompany a rally without leaving your rear
end hanging out on the downside.
However, since a call ratio spread involves selling more
calls than you are buying, a
large move to the upside could expose your position to unlimited
risk. These can be difficult to manage.
With that in mind, I am going to embark on
a semi-tutorial. We are going to buy the Dynegy (DYN) Jan. 30/40 1:2 call spread
at a debit of $1.00, and the
March 30/40 1:2 call spread at a debit of $1.00. We will
need a sell-off/volatility pop to get these done, but I think we will.
Once these spreads are on, we are going to track their
behavior and make adjustments.
They will be the subject of an ongoing dialog in the alerts and
commentary section, and I welcome any questions or comments from readers.
As always, I try to answer questions as fast as I can, but
please understand that I am
trading during the day and don’t always have time to
answer right away.
PowerRating) — We re-established our TLAB position,
buying back the 50% of the March
17.5 call/March 15 put reverse collar that we sold
at $1.05. We repurchased it at a $1.00 credit. We
are now long the March 17.5 call/March 15 put reverse
collar for ~$1.50 credit.
We recommend scaling into ONE of the following
short positions in retail stocks:
Buy-writers in general — scale purchase protective puts.
Complete by Christmas.
A) Put a $1.50 offer in for the Jan. 25 calls to
B) Put a. $.50 offer in for the Dec. 25 calls to roll
into the Jan./Dec. 25 call calendar at a net
cost of .25
PowerRating) — Filled! Put a $1.00 bid in for the JDSU
Jan. 10 calls that we previously
sold for $3.00. These calls were a part of the original JDSU Jan.
7.5 put/Jan. 10 call reverse collar strategy.
Recap of open trades:
Airline calendar spreads
BA Jan. ’03 40/Nov. ‘ 01 40 call calendar @ 3.00 — hold.
Put Spread Positions
AWE: Stop @ 12.25 close only.
WCOM: Stop @ 13.95 close only.
TLAB: Stop @ 11.95 close only.
If you would like to receive Tony and his trading
*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 margin account.
* 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. It
is important to note that the options strategies discussed herein are not
suitable to all investors. Options are complex investment tools and involve
substantial risk. Moreover spreading strategies do not eliminate risk
and involve multiple commissions.
Note: All individuals must have read the
ODD carefully before trading options. To obtain the
document, click on the OCC link: https://www.theocc.com/publications/risks/riskchap1.jsp