In the Eye of the Storm « The Options Report

In the Eye of the Storm

02Mar07

This week was a wild week for sure, the worst week in four years, but it’s just another “crash” that goes down in the markets history books. For me, it was an extremely profitable week. It started Monday night. For the last few weeks, for some odd reason, I’ve been waking up at 2 or 3am(PST) to use the restroom. And whenever I do, I happen to cross my desk to check what the overseas markets are doing …usually the currency markets. This time, I knew markets had been on edge and for the last few days I could sense there was some doom and gloom looming. As I skimmed through Bloomberg.com, I saw the headlines that China markets were down 4% by mid-day and US S&P futures were down 5 ticks based on comments from the China that 1, they might raise rates and 2.. blah blah blah. Few days before I shorted 100 contracts of SPY, just based on the fact that the daily spread was diminishing and open interest was continually climbing.

I also saw that an old leader, the financials, remained weak while overall markets remained near highs. Monday’s Greenspan hawkish “recession” comments and last week’s rate hike in Japan curbed buying interest also. The bottom line is that there was just too much complacency and VIX (volatility index) was flat-lined around 10. With emerging markets leading US markets, I knew that any hiccup would trigger the panic button.

Anyhow, I happend to be betting that markets had potential to fall, and with Shanghai Composite down 8% by morning, my bets looked good. I was long 100 SPY Mar Puts @ 0.75 cents. Tuesday morning they opened at 1.55 and I knew these were looking great. The golden rule for traders is to let winners run and cut loser short. Most great traders also tend to add to winning positions. But since I was also short futures the night before I didn’t want to press the bets. As you know, these markets have been notorious for screwing shorts, so I’d rather not press my luck. Instead, I decided to liquidate long term accounts and positions, i.e. IRAs. All day, there seemed to be mass liquidation. By day end, 30 out of the 30 Dow stocks and 498 of 500 S&P were in the red… this was a crash. My puts closed at 5.1, a 580% gainer!

On Wednesday, I knew this was a market breakdown and any rally should be shorted. Bernanke was speaking and although his words sent a calming bias to US markets, this was a sucker’s rally. Near days end, I add IWM March 80 puts @ 1.70 and BIDU 105 puts @ 3. I was 100% short, locked and loaded. If China stocks were weak, BIDU will crack…and if this was a crash, money rotates to larger caps.. and smaller stocks suffer relatively more. On Friday, we gapped down 100 on DOW and in the first our panic set in and we quickly dropped to 12,059, -587 from Monday’s open. I had to cover, too much profits at stake… I slowly covered half (), then as markets seemed to have a floor, I quickly covered the rest… Let’s just say it was a good week.