Dr. Bill wrote:


"Well I will be interested to see your exit strategy or why you expect this trade to make money. Where is it going and why?And what you will do if you are wrong...

Sell the March 7.50's......IF THERE IS STILL MEAT

ON THEM!!!!!!"


eLROY writes:


Your short-option trade is a serious capital-eater, and a time eater in terms of thought and attention required. I picked the trade I liked best given the subset you established to work with - specifically, the CPN 7.50 puts with a lot of "meat" in them. I cooked up my favorite strategy given the ingredients you put on the table, moreover, choosing a strategy that was contrary to your ideas (the habitual necessity of needing someone to take the other side was more than a small part of the strategy I chose.


Plus, you have people like Wildbill and Javelin saying the sickness has spread too far, it's overdone. But CPN is in a "downtrend" to my eyes. In other words, I'm going contrary to three out of three! It has always been my experience that, no matter how good an idea is, if the other traders in the room all agree with me I should steer clear. But what fun would steering clear have been in this case?


Only, I agree with you, buying long, shallow, options on Thursday was a bad idea. So this way, I make my short delta bet, but postpone it, and go short immediate volatility at the same time. I figure if it's going to go down it will go down only after a pause, chewing through the kneejerk contrarians. Maybe I am trapped in an antiquated bull-market fantasy world, picturing there are all these poeple buying stock, and selling puts just because the news is bad - which is what people learned to do for a decade.


Again, I don't know greeks, but my trade seems like a good way to sell volatility, at the same time as betting on a continued downtrend. Even if implied volatility rises, I expect actual price volatility to go sideways, and let me out of the short Feb even if, somehow, the later-period implied volatility in the April rises. Plus, I am bearish on both the stock and the imvol, so I want to hedge my short short-term volatility.


The original, uncompletely-stated entry is actually long the Aprils 2-to-1 (notice the ">" sign), and really to get a better price on the Aprils by selling the Feb. But I think both legs can stand alone. This way, I can do three things with one commission in the April, I can hedge my near-term delta, reduce my margins/risk, and bet on long-term delta whichever way imvol goes.


So far as exits, I do not see buying back the Feb Once the April becomes standalone, I'll sell it whenever either the downtrend looks over, or the volatility gets too high, and no sooner. As I stated in another post, I have the unusual practice of staying in a trade when I have no clue, and waiting for a sign, at whatever price it may come.


Uhhhhhhhh....


I know I left something out here...


I guess you could call my theory "rolling panic"...


This trade reminds me of Lucent a year or two ago, or of crude in late summer/fall 1997.


eLROY