Heavy Metal

12:15pm EDT: I have been quiet this morning as there’s really not that much to talk about on the equities front. Labor Day weekend is near and thus activity in the tape is more or less muted. I still expect a bounce as suggested by the current Minuette degree wave count (please see last night’s report). NYSE A/D ratio is at 1.9398 right now – which suggests that most likely a counter bounce in equities is in progress.

The Gold bugs finally got their shot at the 1000 mark again – we are awfully close and the triangle breach we have been expecting occurred yesterday afternoon. Which changes our odds to medium term bullish – it seems that we are painting an a-b-c correction and that we are now embarking on the final c leg that might get us close to the March a2008 high of 1029.

Similarly Silver breached its 15.174 mark yesterday (the September contract) and I expect it to push into the 18-19 cluster before it paints a top.

The gold/silver ratio actually gave us a nice hint that this was about to happen (had I bothered to look yesterday). We seem to be painting an a-b-c to the downside thus expect it to breach below 61.5 before the heavy metal tops are in. A sharp swing to the upside would an indication that the end in the gold/silver rallies is nigh.

And of course such a juicy title deserves a kick ass sound track – enjoy 😉

12:44pm EDT: Okay, here’s a little observation for you rats:

Here’s a little map of when I was loading up on OTM SPY and QQQQ puts. Now yesterday and the day before I was roughly up 15% already, which was quite nice. Today the SPX has rallied a whopping …. wait for it …. 2.83 handles and those same puts have lost 33% of their premium – despite the fact that Mr. VIX is only down 1.37 handles?

Something’s rotten at the CBOE my dear rats – I did expect bid/ask spreds to widen and of course volatility does affect option pricing. However a drop in option premium like that is quite excessive and after discussing this with Keirsten we both agree that market makers may be trying to force weak hands to ‘take profits’ and relinquish their long term options. We are not completely sure however and if someone can offer a better theory then let’s hear it.

Of course dumping my puts is the last thing in my mind right now (quite on the contrary) – if you are holding long term puts you will have to sit through nasty games like that for several months – you better be mentally prepared. Just imagine you are up 300% and then watch your profits melt to 200% or less – it’ll be very tempting to just sell and it will take a lot of discipline to fade the momentary premium swings.

The moral of the story: Stop looking at those puts every day – just hold them and also don’t try to jump in and out – I’ve tried that in the past and for a myriad of reasons I decided that it’s not worth it – plus it’s a lot of work.  Changes in the bid/ask spreads can cost you a pretty penny, in particular as volatility jacks up. Then there are those times when you’re sure there will be a bounce and thus get out hoping to buy back cheaper – only to watch the market tank without you. That has happened to me last year and I won’t let that happen this time around.

The smart bear is a lazy bear – use those rips to buy – then just slouch back to your cave and wait things out.