Stocks rebounded from intraday lows, which bordered on a scary meltdown, as the major indices hit new 52-week lows, but they remain vulnerable in coming days. If the action does continue to resemble the pounding needed to create a stock piccata, I would not be surprised to see a consistent flattening of price. And we are losing the seasoning of energy and grains that can provide some satisfactory taste to such a thin and low plate.
This morning I got long a modified strangle in the Spyder Trust (SPY - commentary - Cramer's Take) for the Option Alert Model Portfolio, and I was very tempted to take profits on the put side this afternoon, but by the time I typed up an Alert, the S&P 500 was back to unchanged. Hopefully today was an indication of more volatility to come, and I'll have another chance to leg out of the position. Indeed, the VIX settled above 26 for the first time in four months and is now in a clear uptrend. With earnings around the bend, I think volatility can go higher.
It's not a surprise that the trigger for the selloff came from the financial sector. Fannie Mae (FNM - commentary - Cramer's Take) and Freddie Mac (FRE - commentary - Cramer's Take) dropped some 15% each on word that they would need to raise upwards of $2 billion in capital. The stocks sank to 52-week lows, and implied volatility rose a whopping 45% on the day. Most of the option volume was on the put side, suggesting investors were essentially buying, if not bankruptcy insurance, than protection against the bond holdings that are sure to be downgraded.
Steven Smith Blog Playing The Waiting Game 7/7/2008 9:38 AM EDT The predictions have been made, now we have to see if earnings come in as low as expected.
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.To read more of Steve Smith's options ideas take a free trial to TheStreet.com Options Alerts.
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