Mish, I agree. The gaps take most of the move and especially with light volume, it was a tough call to jump in after the gap. Fortunately, I had some April 37 puts I bought yesterday at the close, they did very nicely.
I think we have another down day tomorrow after a gap and crap. My guess is they rally this thing for the end of the month.
I have been pondering your last sentence.
Let's assume we buy into the Spring rally theory.
Let's look at max pain first, however.
QQQ 36 - hello here we are, no rally projected on this basis as of now
MSFT 65 - wow! I thought this would be 60
INTC 30 - very close, but again no rally projected
CSCO 17 1/2 - another wow (but over 2 times as many calls as puts at 17 1/2) I would prefer an entry closer to 15, but bearish sentiment is heavy.
So here we are. MSFT and CSCO want a rally but QQQ and INTC do not. Let's look further.
INTC is quite interesting. If we throw out the strike 27 1/2 price (where calls outnumber puts by a huge margin), INTC max pain would be 32 1/2 (for about the 4th month in a row), instead of 30. Is the name of the game to get chips (INTC) as low as possible to delta hedge long at that point? Not a lot of differnece between calls at 27, 32 and 35. One good hedge would cover them all and allow a rally all the way to 35 on INTC where it is definately blocked.
The only anomoly in this mess preventing a very strong rally is the QQQ max pain at 36.
Looking at IQUATO I see there is virtually no difference between 36 and 37 as a max pain target.
One more drop, with appropriate put buying could raise that pain level to possibly even 38.
Note too, that the open interest on QQQ 36 and 37 calls combined is 78K. I believe we had 100K at the strike 37 price alone last month.
Not a lot of differnece (35 vs 42) at the 36/37 call level either. Delta hedging now, 42K worth of QQQ at 36 (that is a ton of money, $151M if my math is correct) is that doable?
The real problem comes in at 38 where there are 82K calls vs 19K puts. Delta hedging long at 38 would require another $151M in hedging.
I believe any spring rally, judging from figures right now, to be capped at QQQ 38. This can change if there is a significant change in open interest. That said, I see no reason we could not rally to QQQ 40 (where is that on the INDEX again as I am bad at this stuff) then drop in a hurry at expiry to QQQ 38 (or below).
This is my roadmap and the most attractive play to me (of the generals) is MSFT given its relationship to pain. I will wait for the turn however, in case Zeev issues the "Head for the hills" call, but that remains a low probability event IMO.
Personally I think the criminals are having a tough time this month given the differences between the 4 generals.
I fully expect the double whipsaw. More down (where hedging long occurs), strong rally (too strong if Zeev's target is correct), selloff into expiry down to QQQ 38.
Zeev, any comments or thoughts on the plausability of this criminally minded scenario?
M |
