Thursday, July 13, 2006

Good Scary

Well, not too scary, but scary enough to sell tail vol and look for long index delta. The NDX-100 has equality at 1475 and the SPX is already in the buyable area. We're long some S&P futures and will look to get longer with the morning's dip.

The interesting thing about this morning's dip is that it appears to be a high-odds play to buy a 10 or 10:30 low. This of course will only come into action if the morning gap runs further down and has all the gap faders dump their short term holdings.

What does this have to do with options?

Well, if the NDX does get to 1475 or thereabouts, selling tail vol via front month OTM puts will have the right odds for a trade. The VXN will be up a tick or two and that will help pump up the fast decaying premium. Essentially this is a good example of trading on price extremes: the odds are actually quantifiable.

We're also looking to buy long calls on individual issues as/if they drop through round numbers. NTAP, BBY, CSCO (imagine that!) are good examples.

And for the short put spread types - hang on to your hats as we near the strikes and look for through-strike reversals. That's the last bullet (silver-tinted though) you have in your arsenal.



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