What Was Last Week All About?? Just A Gentle Reminder That Markets Can Sell Off….But Mostly They Go Up

by Dan February 28, 2011 10:39 am • Commentary

[private][private]While I have been a tad bearish of late, I didn’t spend anytime doing victory laps last week when the S&P was down close to 4% from the previous weeks highs Thursday morning…..rather I spent most of my time, between the occasional weepy whine, closing out of bearish bets.
-Sell Off was very disappointing to me, way too orderly and no panic, which said to me we were likely to bounce.
-While I don’t want to be too early re-establishing those bearish positions, I know from my trading history that it would be merely impossible to get back in at the exact optimal moment….translation, I will lose money before I make it.  While i am suggesting to trade when you are certain you will lose, I am suggesting to establish a portion of your position and add when you have the feeling, at least you are int he game and will be ready to pounce when the time is right.

Often when i want to make a near-term bearish bet I buy the SDS , the double short S&P 500 ETF .
–Some people hate these things, I use them for a short term flyer (not an investment) and generally pretty satisfied when I get the direction right, but research and make your own assessment.

RATHER than adding to my equity position, I decided to look at Risk Reversals (selling a put to buy a higher strike call in the same expiration-in this case).

TRADE: BUY the Mar 21/22 RR and take in a .20 credit with stock at ~$21.05.
-Sell 1 Mar 21 Put for .50 and use the proceeds to
-Buy 1 Mar 22 Put for .30

Break-Even on Mar Expiration:
-Downside: 21 or below you are Put the stock but don’t lose money until 20.80 as you received a .20 credit.
-Neutral: btw 21 and 22 you take in the .20 credit.
-Upside: above 22 up 4.5% you have max profit potential with no cap.

***mark to market you will have gains or loses as the stock moves closer and or through the strike you are long or short.


-After more than a month of unrest in the middle east since shock waves were sent through world markets in late Jan (for a bout 12 hours) the markets finally responded last week when things spread to Libya…..Libya, really? that was not who I had in my death pool, but I guess ill take it…….Nothing has changed since last weeks bottom, and in many ways the situation gets worse by the day, Egypt, Yemen, Libya, Iraq, Oman and Bahrain to name just a few.   A new development of the west sending aid to Libyan rebels is likely not to help our standing in the region and follows a long history of us choosing the perceived lesser of 2 evils for the moment.   The real worry is that unrest hits Saudi Arabia, and/or that Iran uses the confusion to mess with Israel.  Oh, and North Korea threated to attack South Korea and the US this past weekend, but you probably missed that.

-So using my solid political science degree earned almost 15 yrs ago i will attempt to make a quick assessment of the geopolitical situation and how it relates to our market.  My assessment is that things SUCK and not likely to get better anytime soon.  I am not sure what genius’s have rubber-stamped the fact that all this rebellion in the most volatile region in world is going to be calming for world markets…..to date we have generally ignored this issues and they will come home to roost.

-Additionally as I said above the “sell-off” last week was way to orderly and clearly relayed and underlying bid as there was no panic, ever, not in index land or single stocks….when that bid fades a bit and investors have something right in front of their faces to fear we will go lower and probably very sharply, possibly something reminiscent of last May/June.[/private][/private]