Hey Boo -- you STINK! Must be the burnt fur!
Will the wind ever remember?
The names it has blown in the past
And with this crutch, its old age and its wisdom
It whispers no, this will be the last
Alright Dawg, it's time to ask some difficult questions and make some honest assessments. Is this the beginning of something beautiful or a brilliant opportunity to make sales? Moreover, is our risk profile an adequate extension of our view while allowing for a sufficient margin of error? Finally, have we identified our time horizon such that we can (attempt to) view prices as an opportunity?
Your answers will likely be unique but, as always, I'll walk through my thought process with hopes that it adds to yours. As you're aware, I entered today's trading with my right hand up but my posture naked (no costume).
As I sat at dinner with Succo last night, I told him I hoped the market would lift so I can scale into a bit more cheap vol. Sure enough, we're getting a (fat) rally and I've stuck with my plan (and stuck a leg into the fur).
So that answers the question regarding my risk profile being an extension of view. However, the other (and perhaps more important) aspect is the stylistic approach I'm employing. Nobody's smarter than the Minx -- we know this -- so it's important to define exposure whenever possible. I've chosen to scale into some May puts and begin partial positions in the big caps. All the while, I'm looking to trade "situations" both ways to augment my exposure.
When does discipline dictate rethinking the strategy? As Tony illustrated in his latest piece, this latest selloff created a "higher" low which is typically bullish. THE test for the Minx will be if she's able to create a "higher high" during this move. That'll come into play around S&P 900 and NDX 1100 which, quite honestly, isn't that far away. With the S's attempting to fill the March 24th gap right now (to 895) we may get our answer sooner rather than later.
One of my favorite sayings is to never let an opinion get in the way of making money. That's a fine line to walk when attempting to use price to your advantage and we must each choose that path for ourselves. Can the VIX melt below 30 and the euphoria carry the Minx higher? Sure, stranger things have happened. As discussed, the ability of the tape to hold this latest test (lower) has emboldened the bulls and spurred them to buy higher. That will last... until it doesn't.
What I'm uncomfortable with are the potential risks, however slight their probability. If I miss an opportunity and lose premium on May paper, that's the cost of doing business and part of the game. The goal, my friends, is not to let a trip turn into a fall. That is easier said than done but (part of) my point is that the relatively cheap option premiums allow me to "play" the downside while knowing, on an absolute basis, what my risk is. Coolio?
The post-Saddam Iraq issues and the ability of the fundamentals to uptick appreciably (after the war) is an entirely different conversation and one that I'll be glad to have. First things first, though, the focus is on the imminent victory in Iraq and the tape will trade as a function of the latest headline. It's the hand we're dealt right now and, well, it is what it is.
Anyway, I hope this sheds some light into what I'm thinking. It may not be right, or it may be early, but it's the most honest opinion that I can offer. During each session, I can always take in some exposure to hedge my delta risk but at the end of the day, I want to have cheap puts on my sheets. I honestly don't know if we need another blowoff (higher) to shake the trees bare but I know one thing: I want to make sure I have a seat when the music stops.
I hope this finds you well.
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 firstname.lastname@example.org.
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