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Trading the Floyd Void

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I'm trying, Toddo, I really am....but I need help from those semis!

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Did they get you to trade you heroes for ghosts?
Hot ashes for trees?
Hot air for a cool breeze?
Cold comfort for change?
Did you exchange a walk on part in the war for a lead role in a cage?


(Pink Floyd)

The tick-tocking towards the lunch hour and we've made an executive decision in Minyanville. Against my better judgment and devoid of all discipline, I've ordered Martin to fetch us grilled cheese (with bacon and tomato), crispy fries and chocolate shakes. Bucky the rabbit has been dieting lately and sticking to the salads but I've got 5 to 1 that he folds. Nobody is that disciplined when it comes to chocolate shakes!

The dichotomy of the day is the battle that's unfolding between the red SOX (semiconductors) and the banks (scratching and clawing to hold on). Consistent with that theme, we're witnessing a classic case of S's over N's (S&P outperformance of NDX) and that's being reflected in the internals. As it stands, downvolume is dwarfing upvolume 10:1 in the Nazz and 3:1 on the big board.

I've been scanning the globe for cheapie December puts to set up some gamma but, as you might expect, volatility has gotten more expensive with this latest leg down. I was legging into "paper" last week when the VIX was floating around 27 as it seemed relatively cheap in front of the catalyst avalanche.

As an example, if you had bought 5000 QQQ December 27 puts and held them until today, you'd make money on both the direction and the uptick in volatility. Now, as the tape comes for sale, the second leg of the trade is to buy some underlying stock on a ratio (ie-250,000 QQQ). If the QQQ rallies, the puts will shrink and you're naked long the underlying instrument. If the market continues its southbound soirée, the puts will kick in and you'd be short 250,000.

I know derivatives are foreign to many of you and I will caution that you should fully understand the risk parameters before dabbling. If you're looking to learn more about volatility trades and option markets, there will be courses offered when the University of Minyanville returns from winter break. We've got a pretty great guy who's going to teach courses ranging from beginning to advanced, so stay tuned for more information.

Back to life, back in reality, the S&P continues to hold the 910 level and I suppose as long as it does, there remains a chance that Snapper peeks his beak out. With that said, the techs trade heavier than a post-lunch Bucky and they've got to find their footing before any tortoise cameo can materialize. Watch KLAC as a guide as they're presenting at CS First Boston right now and everybody and their sister is on that call. For the time being, I'm keeping both legs in my bear costume (50% conviction on the short side) but I'm intrigued by some of the action I'm seeing. As always, you'll be the first to know if my mindset shifts.

I hope this finds you well.

R.P

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