Unreliable Unpredictable and Unfathomable, unless you’ve been watching the past week’s action
May moved 390 points higher in the first hour, then someone bought 12,000 December (Z) 88 puts and prices dropped 657 points in short order!
I spoke with a retail upstairs broker who expressed his exasperation at trying to obtain value for his client on a profitable trade. I’ve learned that value is the price at which someone is willing to transact at that very moment, and it is only a snapshot in time. What might be worthy of a buy at one look can swiftly turn into a sale. And that price may not be the one your computer’s option model suggests, or better yet, let the computer buy it.
Furthermore, traders are wary and guarded. They don’t wish to spend money on trades with limited profit potential when so very many other situations are being presented. And the trading ranks have thinned. Some very good people have been hurt horribly by the wild swings that may appear sexy from a distance. Rumors abound of traders blowing out and that hurts as it tends to further widen the spreads between bids and offers, which is our basic ability to find willing counter parties with which to transact.
But how can you blame someone for not being willing to assume the risk associated with a particular trade? How do you manage risk in this environment? Yesterday, an (ATM), or at the money straddle had a 22% delta because of the calls being so whacked out, (remember prices can only go down to zero, but they can go to the moon on the upside). I’d never seen that situation before. Implied volatility is at unheard of levels and it probably still is a buy when you consider the movement cotton prices have seen.
It was nice to see the screen participate more fully, but there are a bunch of synthetics that need to be taken off and that will only get done with greater frequency once things settle down. I wonder when that will be. I thought it was happening, it isin’t.
War stories and finger pointing are inevitable after such a move and the margin issue is raising some of both. Only last night, and eluded to be afoot in my comments, the ICE decided to institute margining of futures at limits and not synthetics, a format that they only recently adopted. So no sooner had one change been made than another returned. Leadership and consistency is needed badly and it will be interesting to see where that comes from.
At present, I cannot still with any degree of confidence suggest anything other than to try and stay calm and try to own volatility, even in other markets as they too may soon shows signs of cotton’s impact just as wheat has done. Now I know that both cotton and wheat are markets with limits and that in and of itself is an issue. Is it a buffer, or a hindrance? In my book it depends upon the situation and I’ve never seen anything like what stands before me.
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El equipo de Brokers de Futuros USA
Fuente: MF Global
©2007 Jurgens Bauer & Associates all rights reserved.
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