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Pie in the Sky

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If you think I look good now, Tony, wait till you see me in a bikini!

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A long, long time ago, I can still remember
How that music used to make me smile
And I knew that if I had the chance
I could make those people dance

And maybe they'd be happy for a while


(Don McLean)


The battle of Evermore continues to rage and traders are anxiously attempting to assign a method to this madness. As it's a tremendously beautiful day, I collected the critters and we stepped outside for a quick breath of fresh air and a dose of perspective. Sometimes, when staring at your (8) screens all day, it's easy to forget there is life outside the flickering ticks. As the sunlight hit our faces (albeit briefly), the following conversation took place:

Toddo: Hey guys, I know I've been relatively vocal in my cautious approach but I NEED to make sure that you understand the two-sided risks to the tape.

Hoofy: That's what I've been telling you, Toddo -- the market is poised for a stiff move higher if there's an ounce of good news on the war front! I don't mean to be morbid, but if they announce that Saddam or Osama is dead, the dollar will fly and take equities with it. In my estimation, those are inevitable announcements.

Sammy: It's alright, Hoofs -- this is the world we live in and you're not wrong for assimilating the potential market catalysts. Actually, it would be wrong if you didn't factor in the risks to the market.

Toddo: He's right, Hoofs, and I see what you're seeing. The tape clearly "wants" to trade higher into quarter end and from what I can tell, most players are set up that way. That's part of the reason I'm wary -- everyone I speak with seems to be bullish these days and the Minx will always travel the path of maximum frustration. With that said, please pay particular attention to the strategy that I'm employing. I own a smattering of out-of-the-money puts in the big caps (ranging anywhere from .75 to $1) and, when I sense an upside surge, I'll trade the underlying stocks (from the long side) and set up some gamma.

Boo: That sounds like you're hedging Toddo...are you?

Toddo: Hedging in a conventional sense, yes. Sometimes. During the trading session, if I feel a rally, I will hedge my short deltas with some long stock. With that said, and as a function of my perceived fears, I want to go home each night "naked long" those cheapie puts (no stock against). If there is an upside gap the next day, my risk is defined to the premium on my options. I can live with that.

Snapper: But there is upside risk, right? Isn't this stuff classic wall of worry stuff?

Toddo: Maybe, Snaps...I've learned to keep an open mind in my old age. This is potentially the most difficult trading environment in history and I know enough to know that I know very little. (pause) Still, the warning signs are there and ignoring them because the market is rallying would be inconsistent with my approach. I can accept being wrong -- it's part of the game -- but if I tag along because everyone else is doing it and then I lose money, it's unacceptable.

Daisy: What will make you turn bullish, Toddo? I mean, honestly, you wonder why Hoofy is so sensitive!

Toddo: Time or price, Daisy, and I'll again stress that this is simply my opinion. Each Minyan must choose for themselves what is right for them. There are no "easy" answers and plenty of risks. I will simply remind them to allow for a margin of error regardless of their posture. This is very hard and capital preservation should remain a constant thread of any investment thesis.

With that, we all shuffled back into the office and strapped yourself in for the final few hours. We knew that it was likely to be wacky and we needed to be alert and aware. As we approached the front door, I put my arm around Hoofy and said "Bro, you know I love ya, right? It's nothing personal -- it's just risk management." He paused, looked me in the eye and said "I love you too, Toddo, but business is business. With quarter end approaching, I'm gonna do everything in my power to fry your fur."

Duly noted Hoofs...and I wish you all the luck in the world.
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