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The Ship Dip


Eye of the tiger, kid.


It was later than I thought
When I first believed you
Now I cannot share your laughter
Ship of Fools

(Grateful Dead)

The opening jig gave way to (gasp) profit taking and while certain bears looked to press the downside, Boo exhibited a bit of patience and priced out some option strategies. As you know, he's been nibblin' on April puts and he's been early. Now, as we're edging along and trading higher, he's looking to roll some of his paper "out and up" on a dollar neutral basis. What do I mean? Let's take a look.

Let's say, for instance, that Boo was long 1000 QQQ April 27 puts (trading at $1.50) and wanted to buy some more time without spending more money. He could sell his 1000 lot for $150,000 (1000 contracts x 1.50 x 100 multiplier) and use the proceeds to purchase 500 May 29 puts for (roughly) $3.00. While the underlying exposure is reduced, our resident furball will pick up 20 deltas and an extra month (without laying out any more cash). It's just one of many potential strategies but I wanted to walk through the particulars for those looking to gain a better understanding of derivatives. These products are surely NOT for everyone, so please understand that I share this with educational intentions only.

It's interesting to note that the VIX (volatility index) has been holding it's ground (in the face of the rally) and there are a few possible explanations for this. The obvious observation is that the sizable call buyers have bid up volatility levels and that's being reflected in the VIX. The other potential development is that dealers have been scrambling to cover their short gamma in front of expiration which would, among other things, help to explain the exacerbated moves in the marketplace.

Turning our attention towards the tape, the dip buyers once again emerged and took advantage of the early weakness. That psychology is a function of both the previous strength and future performance anxiety. With the S&P approaching 870, Europe acting (relatively) lethargic and the banks teasing BKX 725, I'm going to humbly slip my arm into the metaphorical bear costume. This makes three appendages (75% conviction on the short side). My biggest issue, once again, is one of timing.

I hope this finds you well.
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