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The Tao Chow


Don't forget, guys, markets that are up all day tend to end that way. Mind the gap!


I've gotta tell you, I couldn't possibly love my critters anymore than I do, but its a huge pain in the ass to get a reservation in the city! I had to pull every string I had last night to get a table for 7 at Tao and, as John Succo and I waited in the back booth, the critters worked the room and signed autographs. When they finally arrived at the table and found their seats, the conversation sounded a little like this.

Daisy: Did you see that trader-type try to slip me a $20? What type of cow does he think I am? I almost laid him out!

Boo: What do expect, Daisy, you walk around like you're Kobe beef but you don't want any attention? Look at that picture to the right of this column.You're practically screaming "look at me, look at me!"

Hoofy: Oh, you're one to talk, Boo. You run around everyday screaming about one thing or another. If it's not the plunge protection team, it's the new black plague. I mean, you actually think that SARS is a form of biological warfare? Were you not hugged enough as a cub?

Boo: First of all, relax milk breath. I didn't say the government intervened or that SARS is a form of terrorism. I simply said that it was possible in each case. And, along those lines, don't be so quick to pooh-pooh this thing. I've gotten a lot of emails accusing me of overreacting and, trust me, I hope I am. This is highly contagious and has an incubation period of up to 10 days. That's a scary combination and, at some level, it warrants discussion.

Snapper: Oh, you're a doctor now Boo? Is that what you're telling the honeys at the bar? Don't stray too far from your area of expertise, young one, you'll find yourself in a mess of trouble and...

Succo: I don't mean to interrupt, Sapper, but it's important to factor ALL potential scenarios into your risk profile. Trading is about probability and assigning risk -- and as we wade our way through the bear market, the best traders will be the best risk managers.

The critters sat there looking at John like he had four heads. Boo's mouth actually stopped mid chew and he had a piece of salmon hanging out.

Toddo: Uhh... John, it's SNAPPER, not Sapper.. .just so you know. (turning to the Menagerie) Guys, Succ is one of the most gifted options traders I've ever seen. When I started as a salad boy at Morgan Stanley in '91, he ran the index book for Chuck Feldman. If there's a more talented derivatives guy out there, I haven't met him (her) yet. I'd pay attention to what he's saying.

Sammy: Gotcha Toddo--but what about the market? If it springs higher, it's surely gonna shift the psychology back to Hoofy, right? Isn't it a tell when the market absorbs bad news? The economic numbers have been horrific but nobody seems to care. Isn't that bullish?

Toddo: If we look back at this juncture from higher levels, it'll be obvious that we climbed the wall of worry. If, on the other hand, we look back at this juncture from considerably lower levels, it'll be obvious that the writing was on the wall. The trick --and fine line -- is to view the big picture as a series of little pictures and define your risk relative to your reward. I want to set up gamma with a short-side bias as I feel that's a viable strategy. Yes, vols could "come in" (read: go lower) but relative to everything going on in the world, I think they're a decent do.

Daisy: Hey John, you're very fit for an older guy. What's your secret?

Hoof: (kicking her under the table) Uh, Toddo--one last question. The market is clearly not overbought anymore and, as of now, we've put in a higher low. If you coupled that with your trading tells, why would you trade from the short side rather than the long side? It seems inconsistent.

Boo: 'Cause he's my DAWG, that's why. 3-1-3 Baby!

Toddo: (almost spitting up his drink as he laughs) No, Boo, that's not why. Hoofy has a valid point and rationalization has no place in the trading process. The bottom line is that I don't trust the (triple) bottom in the indices, I think the markets are pricing in the best case scenario (on every front) and, ultimately, I don't think that "winning" the war will cure our ills. By using my current strategy, I can achieve two things: use prices to my advantage and define my risk. That, of course, doesn't mean I'm right but it is a lucid thought process and I'm comfortable in seeing it through. If we push to a "higher high," I'll still want to keep my gamma but I'd be more "open minded" as to the underlying power

Sammy: Fair enough, Toddo--just do me a favor and don't get married to any one critter. There's a lot of stubborn "former" traders out there and you know better than that. I like the defined risk and I applaud the humility. You've got levels your watching, a broader thesis in motion and, worst case scenario, you've defined your risk. I can stomach that -- but mind that gap above S&P 880 tomorrow, if and when, it's on a lot of trading radars.

Succo: I don't disagree, guys, now can we please shift the focus away from the market? It's not every night that I get to dine with five metaphorical critters and I'm intrigued by your mechanism. What makes you tick?

Daisy: In a word, John? Balance. We're all about business during the trading day but when the final bell tolls, it's love, hugs and family. If you spend all your time freaking on the flickering ticks, you'll lead a miserable and myopic existence. That's not allowed in Minyanville -- so if you're gonna stay, you've gotta play by our rules!

Everyone at the table nodded in agreement and as Boo's eyes migrated to the table of lovelies next to us, I raised my glass. "I would like to make a toast." I said as I waited for Boo's attention, "There's a lot of young American kids marching through the desert right now. Here's to getting them home to their families as soon as possible."

We all clinked glasses and paused to let the thought sink in. Regardless of what the market was poised to do, we were with good friends, eating tasty food and life was good. We weren't gonna let the moment pass without recognizing how special it was.

I hope this finds you well.

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