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Wild Wednesday Wrap-Up

D’oh!

Homer was wrong!  Yesterday I said I would be guided by the Odyssey, which states: "It is tedious to tell again tales already plainly told" yet that’s exactly what moved the markets today.

We drifted along at my target levels and it looked like the market was going to give up until about 1:45 when the market started rallying back to retest 13,200.  I commented to members: "Wow, huge buying program (I know it’s a program becuase someone is buying GM, no human would be so stupid!). These are good levels and the VIX is sure happy about it. Stops still apply both ways on winners but I’m more inclined to roll or DD on puts that aren’t working right now."

On further investigation I discovered: "This is the result of a letter Schumer released where Bernanke said Fed was ready to act… Not a very strong run-up considering but that explains the buy programs kicking in."

What exactly did this letter say that rocked the markets?  It said this:

  • "Dear Senator:  Thank you for your recent letters of August 8 and 22, in which you express concern about the potential effects of volatility in financial markets and the tightening of credit conditions on homebuyers, consumers, and the economy as a whole.
  • "I want to assure you that the Federal Reserve, in cooperation with other federal agencies, is closely monitoring developments in financial markets. As you recognized, the Federal Reserve has also taken steps to increase liquidity in the markets. In particular, our changes to our discount window program are designed to assure depositories of the availability of a backstop source of liquidity so that concerns about funding do not constrain them from extending credit and making markets. Also, the Federal Open Market Committee has stated that it is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets".

Wait a minute, didn’t we just, 24 hours ago, ignore the Fed minutes which said:

  • Future policy adjustments would depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. (this was released 8/7)
  •  Further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response.

So why did this tale, already told, get such a different response in Thursday than it did on Wednesday? 

I hate to be a cynic but one might say that it’s because, on Tuesday, no one KNEW what the Fed was going to say.  At 2:51 on Tuesday I told members: "Putting on my fund manager hat, I don’t pull the trigger until I see the selling subside. If I had to guess I’d say people are repositioning, not dumping (not everyone was smart enough to go to cash)."

On Wednesday, however, the rally had already started on Wall Street when the Senator from New York (where Wall Street happens to be) theatrically revealed that he had A LETTER FROM THE CHAIRMAN that said pretty much nothing new but it was enough to break the makets up another 100 points to close with almost a full recovery from the sell-off based on the words of that same Chairman.

Needless to say we heavily coverd our calls, took profits off the table and tightened up the puts!

As I said way back on August 9th from my deck chair in Spain: "Our markets look flaky and uncertainty may be fun for those of us who are quick on our feet but it does tend to drive the real money to safer harbors." and just last week I reminded people: "I have already warned that if our government pursues Asian-style Central Banking policies they will subject our markets to Asian-style market swings but they continue to exert pressure on the Fed and I can assure you, after listening to Chris Dodd’s interpretation of his meeting with Paulson and Bernanke, that the government is CLEARLY playing with forces that they DO NOT understand!

Oil shot up to almost $74 but no one seemed to notice although ZMan and I hit it on the head on our 10:30 radio/webcast spot during the oil inventories when we went long on XOM, VLO and even TSO but they were momentum plays and we are already half out (other than the VLO leaps, which we will cover tomorrow).  The dollar fell back to 80.71 but took a sharp bounce back of the declining 50 dma, which will be at 81 by the time it retests and gold hung out at $675, waiting for the other shoe to drop so it can break back over $700 in my opinion.

We finished the day weighted 600:400 on the put side of our DIA calls but MOST of the calls are now October with adjustment covers being taken on September.  We continue to go into each day with no prejudice, our aim is to go with the flow but tomorrow is GDP data so we went back to our strangle in anticipation of a major market move (again):

 

Description

  Basis

Open

 Sale Price

Sold

 Gain/Loss

%

10 SEP 135.00 AAPL CALL (APVIG) 3,010.00 8/28 4,490.00 8/29 1,480.00 49%
5 SEP 135.00 AAPL CALL (APVIG) 1,510.00 8/28 2,240.00 8/29 730 48%
40 SEP 40.00 CCJ CALL (CCJIH) 3,610.00 8/27 3,590.00 8/29 -20 -1%
20 SEP 80.00 COP PUT (COPUP) 3,310.00 8/27 4,140.00 8/29 830 25%
20 SEP 57.50 CROX CALL (CQJIS) 7,010.00 8/21 8,990.00 8/29 1,980.00 28%
30 OCT 80.00 CVX PUT (CVXVP) 3,010.00 8/27 4,490.00 8/29 1,480.00 49%
30 OCT 80.00 CVX PUT (CVXVP) 3,010.00 8/27 4,490.00 8/29 1,480.00 49%
200 SEP 131.00 DIA CALL (DAWIA) 62,040.00 8/28 76,980.00 8/29 14,940.00 24%
250 SEP 131.00 DIA PUT (DAWUA) 58,760.00 8/28 64,990.00 8/29 6,230.00 11%
20 SEP 150.00 FXI PUT (FFPUT) 15,910.00 8/23 19,690.00 8/29 3,780.00 24%
10 SEP 145.00 FXI CALL (FFPIO) 8,010.00 8/27 12,990.00 8/29 4,980.00 62%
20 OCT 45.00 GME PUT (GMEVI) 2,910.00 8/24 3,390.00 8/29 480 17%
5 SEP 510.00 GOOG CALL (GOPIU) 6,010.00 8/28 5,990.00 8/29 -20 0%
20 SEP 510.00 GOOG CALL (GOPIU) 24,010.00 8/27 23,990.00 8/29 -20 0%
15 SEP 510.00 GOOG CALL (GOPIU) 17,635.00 8/24 22,490.00 8/29 4,855.00 28%
10 SEP 510.00 GOOG CALL (GOPIU) 12,260.00 8/27 15,990.00 8/29 3,730.00 30%
15 SEP 115.00 IBM CALL (IBMIC) 3,010.00 8/27 3,055.00 8/29 45 2%
60 DEC 5.00 IMAX CALL (IMQLA) 4,510.00 9/29 4,190.00 8/29 -320 -7%
20 SEP 30.00 M CALL (MIF) 3,010.00 8/24 2,590.00 8/29 -420 -14%
20 SEP 150.00 PTR CALL (PTRIJ) 5,310.00 8/27 8,390.00 8/29 3,080.00 58%
20 SEP 80.00 RIMM CALL (RFYIP) 7,010.00 8/22 13,990.00 8/29 6,980.00 100%
20 OCT 40.00 T CALL (TJH) 2,710.00 8/22 2,990.00 8/29 280 10%
20 SEP 62.50 TGT CALL (TGTIZ) 4,210.00 8/20 3,990.00 8/29 -220 -5%
20 SEP 35.00 TXN CALL (TXNIG) 910 8/27 1,590.00 8/29 680 75%
15 SEP 75.00 UTX CALL (UTXIO) 1,360.00 8/20 1,490.00 8/29 130 10%
20 SEP 85.00 XOM CALL (XOMIQ) 3,510.00 8/22 4,990.00 8/29 1,480.00 42%

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  1. Phil,
    In last night’s wrap up You said :
    “We finished the day weighted 600:400 on the put side of our DIA calls but MOST of the calls are now October with adjustment covers being taken on September. We continue to go into each day with no prejudice, our aim is to go with the flow but tomorrow is GDP data so we went back to our strangle in anticipation of a major market move (again)”
    Questions: 1. What do you mean by adjustment covers being taken on Sept?
    2. For the strangle to work you had said you need to sell the losing side – What signal do you use to decide which one is a loser in this wildly fluctuating market?
    Thanks!


  2. Ramana,
    What happened to your morning postings of the world markets? I miss them.


  3. My last minute covers were the Sept, not October puts. As a general strategy, as I’ve been saying since last week, I am taking the opportunities presented to move my strangles over to October. One major benefit to this is that we can sell the Sept 18th and Sept 30th contracts against those!

    The losing side changes every day. We use the normal stop out when you lose 20% of your profits rule but with index puts, that included going from 15 to 13%. As you’ll see during the day I often make gut calls to lighten up or add to one side or another but if they go wrong we just have to get out quickly. With mattress plays, once I make .50 I will ruthlessley defend .25 so if you want a simple answer, I keep a .25 trailing stop on a $2ish DIA play (Septembers) and maybe .50 on at $3+ play (the Octobers).

    Remember, these are not trades entirely, they are protects, so I always have puts and calls on both sides. If I am 100% bearish then I MIGHT go 700:300 puts and if I am 100% bullish, maybe 300:700 puts but that’s as right as I ever let myself think I am. Intraday, on a huge rally, I might have a slighly wider ratio while I’m repositioning, but NEVER at the end of day when, as I said, I will slap down some front-month covers.