The Volatility Trader
105 W. Monument Street
Baltimore, MD 21201
Monday, December 11, 2006
Email – #235
Be Alert For A New Trade On Tuesday
Dear Volatility Trader Member,
I hope you had a great weekend and are recharged for another exciting trading week.
With the FOMC set to announce its decision on the Fed Funds rate tomorrow at 2:15 PM EST, we could see a big move.
Of course, this is solely dependant on the “language” that accompanies the decision on interest rates. I’m not expecting any actual change in the interest rates, but the guidance the FOMC gives on a potential rate cut in the first and second quarter of 2007 will be what we’re looking for.
But even if you’re not sure which way the market is going to move, you don’t have to worry about making that leap of faith. Why? Because we’re going to implement a good old fashioned straddle to pocket you some quick, pre-Christmas profits.
However, before I tell you about the trade, I want to stress one crucial point: We’re about to buy penny options that EXPIRE THIS FRIDAY, so the risk level is VERY HIGH. Thus, definitely scale back on your position size!
The Trade
Unless something changes in the option prices (like one side gets really expensive), we’re going to buy some penny puts and calls on the Dow Diamonds Trust (AMEX: DIA) – the Dow Jones Industrial Average tracking stock.
This is because while watching the market today, I noticed that the out-of-the money options are trading for 10 to 15 cents, given that options expiration is so close. But given the FOMC meeting tomorrow, we have a catalyst that could really move the index. What’s more, Goldman Sachs (NYSE: GS) reports earnings tomorrow evening, which will also be a major factor.
I’ve been reading a ton of positive earnings hype on Goldman lately, but I also read that the company experienced a 10% loss in one of its $10 billion funds through November of this year. This will surface in the earnings report, and the key question is: “Has the company’s other investing activities offset this loss?” And in addition, are there any other losses that will come out?”
All of the above spells one thing: Volatility for the broader market. And given that the CBOE Volatility Index (VIX) fell back into its recent bullish range of investor complacency, any “surprises” could really catch Wall Street off guard.
That’s why we’re going to implement this straddle position. The chart below shows that the Dow (via the Diamonds) is trading near a ‘break out’ level. What’s more, consolidation above ascending support of the 3-month trend is sitting just below $122. The only thing we need to know here is that if support or resistance is breached in either direction, the index is going to move. And so will our straddle.
If either the put or call side (I’ll give you specific instructions on the actual trade in the morning) moves close to being “in-the-money,” you can count on a 500+ percent win. But the losing side will be a 100% loser.
The risk is that if the index does not make a move either way, the options could expire worthless in four days.
Yes, this trade is risky, but it also whispers of great returns too.
Again, I will give you exact instructions within an hour of the open tomorrow morning, so please be ready.
Exit is everything,
Mark Whistler
