Tuesday, January 17, 2006

Action: Off The Highs

People are scratching heads here wondering what this action means. Old fear reemerges and erases the recent exhuberance. I love smelling the fear - after all, a big rally gets forgotten quickly when lots of buyers come in at the top and hold through a gritty drawdown.

So, how big a drawdown?

Well, if you are holding long deltas from the top I bet that you're beginning to feel real pain here. Here at Cadence we are holding long deltas from the bottom to mid-move and are experiencing a measure of mild discomfort. For example, we're short DIA 108-109 put spread many times over and as I am writing this, DIA is trading at 109. Of course, we collected lots of theta over the last week and a half so from P&L perspective there is nothing to complain about. However, regardless of where you got in, the point is that right now is when you have to make a decision to stay long or get longer.

Why?

Because had you no position at all, you'd be itching to get in. But because most people do (at this point), they are itching to get out as it is becoming painful to stay in.

Analogy: In the ubiquitous (isn't that amazing?) game of Texas hold'em you raise when someone calls your good hand. You raise because you believe to have a better hand (other reasons as well, but I am simplifying). That raise, by the way, could put you all in and will usually generate a palpable amount of fear. That's how you want it because you are probabilistically a winner when you make that play.

You just have to do that many times to realize the gain.

DIA is 108.90 now. My bet is, it will end up above 109 by this Friday's expiration. So, I raise.

Cheers,
/Dmitry

1 Comments:

At 3:23 AM, Anonymous Anonymous said...

Is that a card up your sleeve? Check.

-a

 

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