A Quick Update
21 Jan 2008
A Quick Update
Although the market is closed today but that hasn’t stop the selling. If you haven’t heard, the stock market throughout the world suffered a severe beating today. It is very likely that we’ll see a gap-down when the US market opens tomorrow. If the futures figures are any guide to tomorrow’s session, the crystal ball is showing a bloody Wall Street.
As of now (1:10 pm EST), the futures for the S&P 500 is down 59.75 points or about 4.51%, the futures for Dow is down 520 points or about 4.3%, the futures for Nasdaq 100 is down 75.5 points or about 4.08% and the futures for the Russell 2000 is down 29.90 points or about 4.43%. It seems like the future is bleak to say the least (pun intended).
I’m going to come straight to the point. Because your money is my money (I have the same positions as you) and I know you want to know the situation we are in now without any beating around the bush.
The bad news first. It is very likely we’ll see losses in some (if not all) of our positions for Feb. A sell-off of this magnitude may be something we haven’t seen since Sep 11, 2001. We don’t know how bad it’ll be yet but judging by the figures we have on hand now, it’s not a nice picture.
I’ll go through some adjustment plans we have in mind for all our current open positions.
The RUT IC initiated on 8 Jan. This is the stickiest trade we have. We are short Feb 650 put and long 640 put for the put spread. We collected $2.55 credit for this IC. When the market closed on Friday, this 650/640 put spread is trading at $2.65. We almost wanted to do a roll down for this put spread on Friday if the RUT were to trade persistently below 670. However, because the 670 level seems to offer some support, we delayed the roll, hoping that we can do the roll on an up-day. It seems like this up-day that we envisioned will not happen very soon. Ironically, come to think about it, if we were to do the roll on Friday and the RUT were to crash big time tomorrow, we may be forced to do another roll tomorrow! If you ask me, I have no idea which scenario is better. Bottom line is, tomorrow’s looming crash is bad.
We’ll most probably see some painful losses in our account tomorrow when the market opens. But we are most likely going to straight on our hands for the first hour or so. Panic-driven trading at the opening bell is something we want to avoid and it takes a while before it settles down. The RUT is now about 23 points away from our short put of 650. Our short put may be ITM tomorrow. I can’t tell you how far we want to roll down tomorrow since we don’t know the exact price now. But the worst thing to happen would be to lock in a loss as we roll. Hopefully, we can roll down far enough to feel safe and still get to keep some of the $2.55 credit we collected. It is unlikely we will simply close the put spread. This put spread will easily cost $3.50 or more tomorrow.
For the SPY IC initiated on 14 Jan, we are short Feb 134 put and long 132 put. This put spread was trading at $0.93 when the market closed on Friday. This is the only low R3 IC we have for Feb. A loss is a loss whether it is a low-risk or a high-risk trade. We may choose to close up the put spread to take in a small loss tomorrow. However, we may also choose to roll this put spread down if the small loss is not entirely small. All option prices will be inflated tomorrow by the rocketing IV. So a roll may be a better adjustment than a simply close up and move on.
For the RUT IC initiated on 15 Jan, we are short Feb 630 put and long 620 put for an IC which we collected $2.20 credit. Again, we may have to roll this put spread down. However, this trade seems to be the most promising among all the trades we have on. We are short 630 put. The RUT is currently trading at 673, which is about 40 points away. If the futures figure were to be duplicated by the actual RUT, the RUT will be too close for comfort. Similar to the rest of the positions, we’ll have a better idea of what to do and where to roll to tomorrow when we have live prices.
The good news is the market is extremely oversold. But as we all know, an oversold market can be even more oversold before a consolidation or reversal begins. We are actually awaiting a FOMC meeting next week. But with the carnage in markets around the world, the Fed may make an emergency announcement tomorrow.
We are now in capital-preserving mode. Profit is secondary. Protecting our trading capital is critical right now. This short note ended up quite long after all. Be prepared for a busy day tomorrow folks. Have your broker’s number on speed dial if you must.
Take care folks! I’ll talk to you very soon.
Gary
