Uh oh Chicken Little…..(trade ideas)

Posted on 08/01/2011


Congressional Budget Office, ISM (manufacturing) numbers, short term financing markets, European close……oh my!



Aggressive, very short term types could play the S&Ps from the long side with a tight stop in an attempt to get a bump from the DC rumor mill. Get LONG 1275 on the Sept. S&P futures with a 5 point stop (1270 – or new lows) and a 1290 target, but CLOSE the position by day’s end. Keep in mind the 200 day moving average (cash) is ~1284 and that’s a critical level for a lot of short AND longer term types.

To reiterate my thoughts from yesterday…..we very well may get a bounce when they FINALLY pass a bill that lifts the debt ceiling, but I think in the coming weeks the Equities/broad market will test 1250 or below.

ALSO, if you played the Crude (WTI) ratio spread (long 1 95 put, short 2 of the 90 puts and possibly short the 108 calls to finance) – I recommend CLOSING the short 108 call for .10 or better ($100).  SELL OUT of the LONG 95 puts @ 2.60 or better ($2,600).

95.00P 1.96 2.65 1.30 2.62 +0.13 10:03 2620.00

Leave yourself SHORT 2 of the 90 puts (or for the more risk averse, cover ONE of the puts for .90) and SELL TO OPEN 2 of the Sept Crude 102 calls @ .50 (or $500). This will leave you SHORT TWO Sept Crude 102/90 strangles – unlimited risk – with break evens AROUND 87 and 105 with 16 calendar days until expiration.

102.00C 0.72 1.10 0.45 0.49 -0.18 10:25 490.00

As a follow up on earlier idea about turning the ratio spread in Crude into a short strangle – two reasons I really like this idea.

1. Crude (implied) vols spiked today and are trading around 37% in the front month. That “implies” nearly $2.20 moves on a daily basis, which very well could happen, but I doubt it will continue to happen. Ergo, I would prefer to be SHORT a bit of 37 vol as opposed to owning it.

2. When the Brent/WTI spread gets north of $21 wide, which it did this morning, I believe the tendency is for WTI to play catch up (outperform).