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The Ship Dip

By

Eye of the tiger, kid.

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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.
position in qqq, spy

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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