By Todd Harrison Apr 08, 2004 9:05 am
Travel safe, Toddo!
Good morning and welcome to the spawning. Yesterday's ride, for the true and the tried, first ripped and then dipped before our own eyes. The rumors were fast and tempers were hot, a difficult place for a most minxy plot. When we settled on in from the dizzying spin, the critters knew not from where to begin. They skipped town en masse and flew through the night but the mood was sincere as they spoke of their plight.
Boo: What's with this Delta Song? There's no first class? My nuts aren't even warm!
Snapper: Well, you've always got Dell (Dell :NASD) and Yahoo! (YHOO:NASD). That should keep 'em pretty toasty!
Sammy: I don't know about you guys but I, for one, look forward to having some tangible data on which to base decisions. The fundamental fascination has officially begun and while psychology will co-chair the big events, it's a heckuva lot better than watching traders chase the chatter trail . Yesterday's Snapper Trapper was a silly (and all too familiar) squeeze in thin volume with anxious anticipation of phantom news. It's quite frustrating at times.
Daisy: But that's the world we live in, right? Don't we have to factor that variable into any risk profile?
Hoofy: Yes dear, but a financial strategy is about assigning risk to different probabilities. That assimilation, in and of itself, dictates our posture at any given time.
Boo: And you guys don't think that Iraq--and the entire region for that matter--is a cause for concern? I'm not weighing in on whether we should be there, I'm simply looking at the geopolitical environment with a very thin margin for error. That pertains both to the fragile nature of the world's economic balance and the ramifications of a prolonged occupation.
Sammy: That's a delicate topic of discussion, my friend, as it stirs white hot emotions at every turn. As such, it's rarely addressed and is often only mentioned as a "cause" after the market is lower.
Snapper: But until the market IS lower, the "action" (and ability to brush off the news) is a bullish indicator. How do you balance the two?
Daisy: Carefully. Remember, in a complex globally intertwined derivative based financial system, historic optimism, daunting debt and debilitating deficits carry far greater systematic risk. And the intensity will only build as we wade through the 9-11 investigation and edge closer to what promises to be a bitter election. Again, there is a heated difference of opinion juxtaposed against a psychology bubble. You can think and feel however you want--that is your given right--but you MUST respect the potential conflagulation.
Hoofy: As a bull, that means something entirely different than it does to, say, Boo. I'm looking at risk definition strategies that allow for continued upside participation (as a function of my view). If I'm a sophistiicated critter, that might mean I replace my stock with calls--the premiums are quite low and your only risk is the price of the option. Or, if you so choose, you could buy protective puts against your stock. If you do this "one up," you will exactly mimick the call option risk profile. If you trade it "on a ratio" (delta neutral), you can eliminate your directional risk and establish positive gamma. Kinda kewl, eh?
Sammy: And you best be tellin' ye faithful that options aren't for everyone and should only be traded if you're qualified. There are a ton of derivative traders out there that make quite the living selling premium to the neophytes.
Boo: True dat. And from my vantage point, I can lock in current volatility levels until AFTER the election. If the market takes a poop, option volatility will scream and I'll nail the Japanese arbitrage (or the Texas two-step, both are trading parlace for having both sides of a two-sided bet pointing the same way). Either way, and regardless of your short-, medium- or long-term outlook, you can use this quiet time to set up a fantastic strategy!
Snapper: Well, don't forget that we're also hovering near some important technical levels--S&P 1160 and SOX 500 among them. Plus lotsa stochastics have given sell signals-the NDX, Trannies and cyclicals to name a few. Will it trump the other metrics? Not sure--but a few scenarios could play out. Either we never breach the S&P ceiling and the "top" is in, we blip through it (simply because SO MANY people are staring at it) only to fail miserably (false breakout) by S&P 1175 OR the bulls--who deserve some snaps if, for no other reason than that they're thus far vindicated--ride the tight corporate bonds and reflation trade higher and longer still, thereby irradicating and outlawing fur in social circles.
Hoofy: That's alotta "if's" big guy but I appreciate you mapping out the landscape. It ain't easy, that's for sure...
Sammy: No, it's not, and we're living in a scary world. That particular statement isn't just for the financial markets, but rather for the world itself (which, inevitably, will lead back to the financial markets). Just remember that we must always respect price action but never defer to it. For if we did that, stocks would be "better" higher and "worse" lower, the antithesis of profitable trading.
The captain turned on the non-smoking sign--which is kinda silly 'cause there's no smoking in airplanes--and the critters strapped themselves in for the final approach. It was certainly a lot to digest but they were taking it all in stride. They knew that Grandma Dorothy's maztah brei awaited them and there are few things in life as ful-fillin' as that. Good luck into today's muck, Minyans, and have a safe, peaceful and joyous holiday weekend.
Fare ye well
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