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Place of Trading

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Louis Winthorpe III just burst into our trading room (on his way to Duke&Duke), gathered the critters in a tight circle and offered the following advice. "Think big, think positive, never show any sign of weakness. Buy low, sell high. Fear? That's the other critters problem. Nothing you have ever experienced will prepare you for the unlimited carnage you are about to witness. Superbowl, World Series-they don't know what pressure is. In this tape, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One moment you're up half a mil in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?"

The critters looked at each other and then to me for direction. "Take it easy Louie," I said, "these critters are no stranger to the trading game. They know that above all else, they need to maintain composure and keep their cool. This isn't the frozen orange juice market, man, these are equities and they have a lot more moving parts." As I was finishing my thought, Beeks walked into the room and handed us today's crop report. It showed a surge in both housing starts and building permits, as well as marginally higher jobless claims. He also asked if he could hang with the Menagerie for a bit as we have Industrial production (exp. 0.1%) and capacity utilization (exp.76.0%) at 9:15 EST and the Philly Fed at high noon (exp. 1.8). The critters nodded their head in unison.

With the whole clan centered around me, I wanted to take the time to explain a trading strategy that we sometimes employ during expiration week. Again, this isn't advice on how to trade-I'm simply communicating what we sometimes do with the hopes that it sheds light on the process. During expiration weeks, we'll often look at cheapie "punts" that offer a good potential reward relative to its given risk. For instance, yesterday you could have bought the QQQ October 23 puts for 50 cents. These give you the right (but not the obligation) to sell the underlying security (QQQ) at $23 through tomorrow afternoon (expiration). For arguments sake, let's assume we bought 1000 of these puts (remember: options have a multiplier of 100, so 1000 puts give you the right to short 100,000 shares) and, at the same time, we purchased 50,000 QQQ at $23. With the avalanche of news due out in the days ahead, our risk profile is set up such that we are delta long 50,000 QQQ above the strike or short 50,000 QQQ below the strike. For that right (positive gamma), you must pay a premium (cost of the option). Follow?

We're seeing some reaching pre-opening as hedgies chase the ETF's and we're left to wonder if the rampant psychology is self fulfilling or if they're "sucking you in." I will be paying close attention to our resistance levels (we're almost there on the opening) while keeping half an eye focused on the fixed income market. If bonds continue to get smoked, the perception is that equities will hold a bid...or at least that's what every trader on the street is thinking. Other tells today include the banks (BKX resistance 745-750), the SOX (on the back of Intel yesterday), the retailers (digestion of the Sears miss) and the breadth.

Now if you'll excuse me, I have a breakfast date with Penelope and it's time to go. This is, of course, according to my Roche Vauceau, the finest water-resistant watch in the world. Singularly unique, sculptured in design, hand-crafted in Switzerland and water resistant to three atmospheres. It is the sports watch of the '80's!

See you after the opening.


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