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Time to Like Short Shorts

There's more downside ahead, so shorting stocks and selling naked calls may be the way to play it.

My working assumption until Wednesday was that the market would notexperience any meaningful setback until the October options were out of theway this Friday. Well, Wednesday was a pretty good setback, andone has to conclude that the upward pull of unwinding bearish option bets(long puts, short calls) is done.

Wednesday's session was anegative one-day reversal with a big up opening -- a post-WTC recoveryhigh -- and a close just about at the day's low. The range also traversed alot of points (35 points for the


December futures). Wednesday also qualifies as an "outside day," meaning there was a top above the prior session high and a low below theprior session low. This is bearish.

Also, at Wednesday's high, the OEX bumped right into the downtrend lineoff the May high, a good spot to look at putting on short sales. This isespecially 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


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, which hasbeen on a tear since opening down at the $35 level the morning of the lastexpiration day, the Sept. 21 low. On Tuesday, the company announced itwould buy back stock, which helped send the shares up $1.39. AndWednesday, 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 anythingleft after all that, so I shorted the stock yesterday. Maybe it could pullback to $42.5 or $41.5, which would be about a 50%retracement. Citigroup also has beenreflective of the overall market of late, so we can draw general marketconclusions from its action. It wouldn't surprise me if the market hadabout 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 moredownside is coming.

My conclusion is that the short side is the place to be once again, and I'mgoing to play it mainly by shorting stocks and selling

naked calls. Whyno 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.

Jay Shartsis is director of options trading for R.F. Lafferty, where he has authored his market letter Shartsis on Charts since 1979. Shartsis has also written The Striking Price column many times in Barron's. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At the time of publication, Shartsis was short Citigroup. Shartsis appreciates your feedback and invites you to send it to