Tuesday, March 07, 2006

Action: Oil, Gold, Housing, Biotech

Listless action in the indices. Even though I always heed the old saying "don't short a dead market", I read today as bearish. Reason: if yesterday's drop was unimportant then I fully expect it to be bought aggressively. Well, so far today is anything but aggressive.

We did not add to our short positions this morning as the rally we got was just ... small. Instead, we'll either expect a stronger rally or just wait to cover lower. It's just me - often I can't stand to add to winning positions. Something to ponder. Glad I don't make all the trading decisions! :)

Now, other sectors are moving nicely with Housing, and Oil hitting oversold levels.
  • In Housing we're leaning long calls in KBH, RYL and BZH. I do expect this sector to grind lower, so these puchases are initial position builders.
  • Oil looks terrible and that tells us to sell OTM vertical put spreads. Basically we are legging into an "iron condor" position with short call spreads sold higher and puts spreads being sold lower. Names: HYDL, SFY, and of course, APC.
  • Gold spot looks bad here but the stocks (NEM, ABX, AU) paint a different picture. NEM punched through 50 and we have a consensus that buying April 50 calls is a good thing with the stock trading below strike. We did miss a good entry at around 49.50 but I think we'll get another opportunity. Too many hands in the pot...
  • Biotech BBH "breakout" was a headfake but I don't expect the Holders to break below 185 any time soon. Excellent premium there and we're selling it on downticks.
To sum it up, we are bottom fishing by either leaning long calls or selling overpriced put premium in these sectors. Note that there is considerable risk in doing this as short gamma exposure this close to expiration can get worse very quickly.

But risk has two sides. More on that later.

Chers,
/Dmitry

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