Monday, February 27, 2006

An Option Trader's View

I always said to a head trader of an options firm I used to work for a long time ago: "Take a view". Why? Because focusing on just capturing the bid/asked spread in an often illiquid (options) market isn't a worthwhile game. I'll explain this at some point in detail.

Naturally, there are more than one kind of a view. At Cadence Capital I condone either a volatility view (essentially an arb play between realized and implied) or a directional view. Often I combine the two.

Personally, directional views is where I like it the most. Maybe it's because I've done a lot of stock in the past (before my re-incarantion in the options world) or maybe it's because delta is the ultimate money maker.

So, here is where I am putting our money from a directional perspective:
  • I am a bear on Oil for at least the next month. At this juncture we will sell any rallies that may follow today's action. The reason for us not getting short outright right here is that there is also a great possibility that the spot will consolidate in this range for a while before moving lower. Thus I'd like to sell the highs, not the lows of the range.
  • I am neutral on Gold in the short term. It doesn't have to break hard, but I do think it's done here. We will sell rallies and buy breaks. From an options perspective a ratio strangle (with the calls outweighing the puts) is the play. We want to sell more calls because I see the buying interest still lingering here with weak rallies giving us better prices.
  • I am a bear on Housing. KBH, RYL, BZH should be heading lower and we are getting short credit call spreads on any strength. Now, keep in mind that I am not a long term bear on Housing and I don't subscribe to the usual "interest rates/bubble/recession" rhetoric. I just don't care. I am not an economist, I am trader.
I have other views as well but the three above are the most defined. As far as the overall market is concerned, I like the strength today (NDX-100 traded through my majic 1682 number and hopefully stays above it), but I am not finding anything actionable on this level.

I will update everyone later in the day with "What We Are Doing" post as far as our fund's activities are concerned. Good Trading Week to all!

Cheers,
/Dmitry

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