I'm Looking For Volatility To Increase, So Here's What I'm Doing

The SPX ($SPX.X | Quote | Chart | News | PowerRating) range narrowed to 7 points yesterday and volume expanded to 1.86 billion shares, the most since you have had the table which was the week ending Oct. 31. The Generals continue to move things around, but certainly no selling pressure yet, as the percentage range closing for the last four days are 100, 87, 100 and 100. In fact, it's so "perfect" with all of the positive economic news and price at new highs despite historically extremely overbought readings in anything you look at, including seven straight up weeks now for the SPX and Dow ($INDU | Quote | Chart | News | PowerRating), that this corner put on a long synthetic straddle yesterday and will add more today if they push price any more.

For Active Traders

Because the SPX is also in a major retracement zone after the current seven-week up move, including the early January new money period, I look for volatility to increase, and therefore I feel it's a good time to put on a delta neutral non-directional trade with current implied volatility in the lower zone. Risk on a trade like this is limited to the net debit of the options. Adjustments are made to the trade as the delta changes, and of course, I'm in a position to take advantage of any significant move in either direction. If the SPX sits in this retracement zone or goes sideways, time and lower implied volatility hurt the trade, but not more than the extent of the net debit of the options bought. Any negative surprise in the terrorist or US Dollar situations would accelerate direction and implied volatility, which both are benefits to the trade, not to mention a retracement by the major indices from this current major retracement zone.

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The (SMH | Quote | Chart | News | PowerRating)s led the sectors yesterday and closed at 44.82, a new rally high, with the (OIH | Quote | Chart | News | PowerRating)s at +2.1%. After three out of four down days, the CYC was +1.2%, while the RTH led the downside at -1.3%, as (KSS | Quote | Chart | News | PowerRating) disappointed and ended the day at -8.1%. It was a same-store sales day for retail stocks with (WMT | Quote | Chart | News | PowerRating), (TGT | Quote | Chart | News | PowerRating) and (ANN | Quote | Chart | News | PowerRating) gapping up on the open, but closing down, while KSS was down wire-to-wire, and then you had Nordstrom (JWN | Quote | Chart | News | PowerRating) which closed up over 3.0%. When they trash these stocks like KSS and GPS it creates opportunity because they get very extended in a short time, setting up reflex trades for daytraders, so they remain a focus.

The semiconductors were led by (TXN | Quote | Chart | News | PowerRating) +6.3%, which is the third most weighted stock in the SMH HOLDRs behind (INTC | Quote | Chart | News | PowerRating) and (AMAT | Quote | Chart | News | PowerRating). But more importantly, the semi equipment stocks were green yesterday, with (NVLS | Quote | Chart | News | PowerRating) +2.4%, AMAT +2.3% and (KLAC | Quote | Chart | News | PowerRating) +1.7%.

It wasn't a good day for SPX traders yesterday, as the SPX traded in a 5-point range all day between 1130 - 1125 and then it moved up in the last 10 minutes to the 1131.92 close. The SMH opened up at 44 from the previous close of 43.66, but gave you a gap pullback to 43.69 which was at the 20-period EMA (five-minute chart), then rallied to 44.97, closing at 44.82.

(CTX | Quote | Chart | News | PowerRating) provided a nice bonus as it had closed at 104.80 the previous day and opened yesterday at 98.25 and hit an intraday low of 96.66. Needless to say, this 1,2,3 lower top short trade (puts) has been good as CTX has declined -11.3% from entry. The XLKs were +2.0%, while the XLB was only +0.1%. This trade favoring technology over smokestacks is going the right way, but I still took 50% off the table yesterday.

Today's Action

I don't want to have any surprises next week as the new money first week of 2004 ends, in addition to the Jan. 12 and 13 time period, not to mention the SPX retracement zone and the Nasdaq Composite ($COMPQ | Quote | Chart | News | PowerRating) now at the 3.14 extension level of 2092, closing at 2100 yesterday. I am very happy to be in the long synthetic straddle and watch which way it plays out because either way is good, but if it does nothing for three months, I lose only the option debit, but I highly doubt the major indices will do nothing through the end of March. In the meantime, it's scrolling as usual for the daytrading setups.

Have a good trading day,

Kevin Haggerty