Wednesday, March 15, 2006

Momentum Fade

Expiration is upon us so there are two things we are looking to do:
  1. Fade realized volatility. This strategy should have 70-80% of focus dedicated to it.
  2. Sell April premium. 20-30% of activity is allocated here.
The biggest trade we're looking to put on is a fade of the OEX rally by buying April 590 puts as soon the index starts ticking above 590. Also, I think the recent advances in Housing and Metal Miners can also be faded - but this time by selling OTM call verticals. Since we are six weeks out from April expiration, it is possible to collect around 10% in premium per spread with lots of margin of direcitonal error built into it. However, while this is certainly game-able we don't recommend being aggressive on this strategy.

The reason we recommend to lighten up on our staple of selling premium this week is due to the fact that most directional moves won't have follow-throughs that are actionable over the next six week term. By actionable I mean the type of a move that creates a probability distribution that deterministically affects forward pricing. So, while this week is the wrong week to develop a directional view, it is the right week to be a short term contrarian.

... And the cynic inside me rejoices!



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