Playing QQQQ

When playing options, we could either play in-the-money options or out-of-money options. For QQQQ, I like to play in-the-money options with at least 30 trading days left. This is because in-the-money options tend to have a much smaller time-value than out-of-money options. For example, when QQQQ was at $36.00, the various in-the-money QQQQ options with its bid/ask price and time value were:

Options Description Bid/Ask Price Max. Time Value

• Aug $36 Put 0.95/1.00 1.00
• Aug $37 Put 1.50/1.55 0.55
• Aug $38 Put 2.15/2.20 0.20

Furthermore, when playing in-the-money QQQQ options (with at least $1.00 of intrinsic value), the movement of the option price follows the stock price movement very closely. As such, I get maximum price appreciation while putting up just a fraction of the price of the QQQQ stock. For example, by playing Aug $38 Put (say paying $2.20), when the price of the stock drops by $0.50, I could expect about $0.45 price appreciation for my Aug $38 options.

Another advantage for playing in-the-money options is that we minimise the time decay waterfall effect especially during the expiration week.

However, should the stock goes against you, you tend to lose more than those who bought out-of-money options.

- PersianCat04 (Millionaire-in-progress)

Middle-East Crisis - 13 July 06

Prior to Israeli military strikes in Lebanon, I believed the market is just waiting for any excuse to rally off its recent low (just like it tried to do on Tuesday, 11 July - rally on news that KLA Tencor is raising its guidance). The S&P 500 formed a bull-flag, i.e. a rally is due soon and it will be fast & furious.

Daily Chart showing the bull-flag (if we take out the last candle - yesterday's candle)

However, the Israeli military strikes in Lebanon changed all that. It seems that the market will get worse before it gets better. Please refer to my 18 May 06 blog posting. Perhaps, this is the trigger that would crash the US market (and the global market). Hopefully, it does not happen but we should be prepared.

The latest Middle East crisis if not tackled rationally could drag Syria and worse, drag Iran to war. Already Iranian President said that any attack on Syria (to punish its support for the anti-Israel militants in Lebanon) is an attack to the Muslim world. It means Iran would be drag into the whole crisis. I cannot help but think that this is the perfect excuse for Israel (with moral support from US) to bomb Iran's nuclear plants. That will "solve" US problem of having to negotiate with Iran on the nuclear stand-off. It seems like everything is well scripted. Iran's involvement would likely increase the oil prices as Iran threatens to choke off the Straits of Hormuz (if it under attack) thus choking off 30% of world oil supplies - thus lead to a dramatic and perhaps a sustained increase in oil prices. This would cause the world stock markets to slide and slide and slide....... and world economy tumble.

Enough of the geo-politics, now how should we play?

Since today is Friday, no sane trader/investor would like to keep a long position over the weekend (anything can happen over the weekend). If they do, they would probably have hedged it. If the crisis escalated, energy stocks should benefit as the oil prices is expected to break new record. Already it broke its record high yesterday and it broke again (US$78) today in the Asian market. To break $80 or even US$100 is within reach.

The rest of the stocks would drop. Close one eye (pun intended) and sell anything except energy (and perhaps gold/metals stocks).

If the crisis showed a promising early end, the market quick reflex would be a rally. Next week, we have a few heavy technology companies which are releasing their earnings. These include AAPL, GOOG and INTC. Their earnings announcement would also move the market.

I have already in position KBH Aug 45 Put and QQQQAug 38 Put (played this yesterday). Both are positive at the moment. KBH was played on 5 July (now waiting for a 100% return - coming soon). Will probably add more positions on other counters later. Of course, playing ES, ER2 or NQ is good if the timing is right.

My XSNX is negative. Will just keep this (very small play) and revisit at end of July.

- PersianCat04 (Millioanaire-in-progress)

Events Updates - Immediately after FOMC

As expected, the market made dramatic moves after the FOMC results. Immediately after the FOMC results, the following moved as much as:

• QQQQ +$0.88
• S&P Index +32.08 points
• Dow Jones 30 +133.35 points

All the above closed towards its session high.

How did I play?

When the news was out, I interpreted that the FOMC would be "data dependent" in raising interest rate (as I expected, as such should not be good news). However, the market treated that as good news and pushed the stocks up. So as the QQQQ retraced back after the rally, I bought the QQQQ Aug 39 Put (in-the-money) thinking that the market had overextended itself. However, the market rally further. My trade was negative for the next 2 days (30/6 - last day of the 2nd Quarter & 3/7 - half-day due to pre-Independence Day holiday). As expected, the QQQQ corrected itself thereafter. The extensiveness of the 29 June rally was partly due to fund managers trying to pruce up their portfolio before the end of the 2nd Qquarter. Closed my QQQQ on 10 July after the QQQQ bounced off its 52-week low. Made 44% over 6 trading days.

- PersianCat04 (Millionaire-in-progress)