Feb 18th, 2008 – President’s Day

Last week was an OK week. Up about 1% when all was said and done. I was right on with Tuesday’s prediction that the S&P would close at 1350, due to heavy put and call open interest at that level.
I am curious to see what this week will bring. I did make a few friday trades that took advantage of a gap down open, then market rise to 1349.99 on the S&P.
AXP – sold 45/37.5 for 2.25
AMT – sold 2 – 1/2 unit levels for .45 and .46. I also “fat-fingered” a 1 unit sell for .45, and then bought it back for .40.
WB- 1 unit purchase of 32.5/27.5p for 1.60 on a consolidation breakdown. This closed against me slightly.
UST – I filled a 5% allocation on one of my accts with this calendar. Mar/Apr 55p for .55, and 2 units of Mar/Apr 55c for .57 and .55. I will look to add to this position in other accts if I can get better pricing.
This has been on my mind all weekend:

Specifically, the twin consolidating triangles (Blue lines). Which way do we go? The market surprise would be an upside breakout. This could make sense. I would be quick to cut my shorts above the black secondary trendline. The portfolio would be OK with it either way. I would just have to ditch some directional plays to the downside if we get an upside breakout.
The upside surprise is speculation. We are still in a downtrend period. I am looking at the option of June Quarterly Straddles. Currently they have a 19.9% IV which is the lowest of the bunch, and with 133 days until expiration these offer an opportunity for multiple delta neutral adjustments during the next 3 months. The delta/gamma may not pay out enough to beat out the Theta decay. Crazy situation.
Volatility Index – VIX Daily

We are sitting at the 50 day MA of the VIX. The drop in Volatility is my biggest concern with the Straddle play. This is why I am looking at the June Qtrlys. On a rise in the markets we may see a drop in the the IV and I would get a volatility crush. Ideally I will attempt to purchase these “behind the net” and get a good price on a VIX drop. This tightening of the triangle in conduction with a VIX contraction seems like a perfect delta neutral play prior to the anticipated SPY breakout.
I won’t place a huge bet, but I will be looking for an entry on Tues/Wedn and build this position for the next couple of weeks.
My gut tells me that we rise on Tues and Wed. Mostly due the the 3 day weekend being complete. People will want to put money back in the Market and early week Mutual fund/401k flows enter. By the end of the week I think we will have an answer for breakout direction.
Disclaimer: Remember I am a ski instructor by profession, not an investment professional. I can work wonders with your skiing. These trades and analysis are for my living, and others may use them for entertainment.