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Angry Options

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Maybe I should take the next coupla days off?

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Dr. David Banner, physician, scientist, searching for a way to tap into the hidden strengths that all humans have. Then an accidental overdose of gamma radiation interacts with his unique body chemistry. And now, when David Banner grows angry or outraged, a startling metamorphosis occurs. The creature is driven by rage and pursued by inquisitive critters.

--The Incredible Hulk, 1977



Good morning and welcome back to the green monster. After stretching her legs on a Monday run, the Minx settled down easy the last few sessions and caught her breath. With supply above and demand below, the frustration migration was in full effect as traders chased their tails. Bored? Tired? In need of some action? Fear not, fellow Minyans, as today's double dosage of earnings and economics will inject some life into the beast. Just do me a favor and don't make me angry, Mr. McGee -- you wouldn't like me when I'm angry!

As Minyanville is an educational community, I thought it might be useful to share my strategy heading into Friday's expiration. We've discussed my thoughts regarding our current juncture and, as a logical next step, a risk profile must be crafted that serves as an extension to that. In a nutshell, I'm looking for a way to protect (capture) a potential "blow off" higher while staying true to my view that sticks with Boo's crew.

Over the course of recent weeks, I've been trading around June (defined risk) puts. That happens in a couple of ways. I can rent the underlying (or ETFs) on a ratio (intraday) against my "paper," I can set up some defined risk upsides and play the rotation (into consumers?) or I can toss on some front-month upside punts as protection into Friday. I've been doing all three, to a degree, and the resulting gamma provides me my desired risk profile.

As an example, I own two sets of puts -- the Junes, as discussed, and a handful of Sept./Oct. Umbrellas (for a rainy day). Against that, I own a coupla June calls in the consumer/drug complex and yesterday, near the bell, I "took down" 2500 QQQ May 29 calls for a dime. These QQQ calls "protect" me if the Minx gets horny and runs with the bulls into Friday's expiration. If she grows fur and takes a trip southbound? My defined risk is the premium paid which, in this case, is $25,000 (2500 x .10 x 100 multiplier).

Please understand that derivative plays aren't for everyone and there are a lotta moving parts in the pricing mechanism. When we discuss the VIX (or VXN or QQV), we're talking about the volatility that prices into an option contract. The VIX has been (almost) cut in half since mid-March and that's a topic of great debate in trading circles. Is it a sign of complacency... or are we reverting back to pre-bubble volatility ranges? Either way, one thing's for sure -- you can buy options a lot cheaper than you could two months ago.

My point is, with all these numbers coming out, there is a potential for a sharp move (either way). While I believe (and ultimately want to capture) the south side Sally, I must protect myself against a Spike, Lee. The tape trades firm -- there's no denying that -- and the simple truth is that she may need to exhaust herself before reversing course. Time will tell, my friends, and it promises to be most interesting.

Finally, and perhaps most importantly, young Fokker has compiled the bottom-dweller list of the Minyanship's WORST bands. Without further ado....at No. 10: REO Speedwagon. No. 9: Air Supply. No. 8: Culture Club. No. 7: Twisted Sister. No. 6: Menudo. No. 5: New Kids on the Block. No. 4: WHAM!. No. 3: N'Sync. No. 2: ABBA and the Number One all-time worst band, as voted by the Minyans... Millli Vanilli! Hey, blame it on the rain!

Good luck today.

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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.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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