Time to Like Short Shorts

My working assumption until Wednesday was that the market would not experience any meaningful setback until the October options were out of the way this Friday. Well, Wednesday was a pretty good setback, and one has to conclude that the upward pull of unwinding bearish option bets (long puts , short calls ) is done.

Wednesday's session was a negative one-day reversal with a big up opening -- a post-WTC recovery high -- and a close just about at the day's low. The range also traversed a lot of points (35 points for the S&P December futures). Wednesday also qualifies as an "outside day," meaning there was a top above the prior session high and a low below the prior session low. This is bearish.

Also, at Wednesday's high, the OEX bumped right into the downtrend line off the May high, a good spot to look at putting on short sales. This is especially true considering there's been a very big rally since the Sept. 21 lows, with no correction worth mentioning.

A possible short trade might work in Citigroup(C Quote), which has been on a tear since opening down at the $35 level the morning of the last expiration day, the Sept. 21 low. On Tuesday, the company announced it would buy back stock, which helped send the shares up $1.39. And Wednesday, with earnings out, it traded as high as $47.70. That's about a 33% move in less than a month, and it pushes the stock right into the $47.48 resistance level set up by the top formed between April and August.

I didn't think Citigroup had anything left after all that, so I shorted the stock yesterday. Maybe it could pull back to $42.5 or $41.5, which would be about a 50% retracement. Citigroup also has been reflective of the overall market of late, so we can draw general market conclusions from its action. It wouldn't surprise me if the market had about a 50% retracement of its move up from the Sept. 21 lows.

While there was a sharp drop on Wednesday, there was no rush back to put-buying; the Chicago Board Options Exchange equity ratio finished at 0.72. That suggests more downside is coming.

My conclusion is that the short side is the place to be once again, and I'm going to play it mainly by shorting stocks and selling naked calls . Why no put-buying? Because I've found that, from a psychological standpoint, I'm able to hold naked-call positions and patiently allow them to come to fruition. I'm not able to hold puts as successfully. I guess I feel that time is on the side of the option seller, not the option buyer.