An Update on the CME Trade

I have had little time to trade the past two days. I did sell my position in Cisco (CSCO) today. The stock has had a long run since March and has been making new highs for the past couple of weeks on lighter volume than during the earlier part of the rally. The stock looks a bit tired. Also, CSCO reports earnings tomorrow. I have no idea what to expect and decided to take my money and run.

As I mentioned the other day, we have a position in Wuxi Pharma. We have a target price of $15 a share (based on resistence levels on the chart). I also indicated that I would be happy to take some money off the table before then if the stock gave me some cause for concern. Accordingly, I sold half of my position at just below $11 a share. I will keep a close eye on the other half of the position.

The CME dropped slightly today. It also closed in the lower half of it's daily range. I have a nice profit on this trade and do not intend to let it slip away. There is very short-term support for the stock at about $274 per share. If the stock breaks below that level, I would take my profit. Otherwise, I will continue to wait for it to get up to $295 - $300.

The CME August 260 call closed today at $22.40 a contract. Since we last checked the CME trade, the stock is down from $280.27 to $278.94 a share (-$1.33). The August 260 call has dropped from $25.35 to $22.40 a contract. How could the option drop further than the stock? This is happening because the call now has very little time left to expiration, so Theta (time decay) is working against this option big time. Also, the implied volatility on this stock fell a little bit last week, so Vega (volatility risk) is also working against this option.

This is why you should not trade short term options. You have way too much exposure to time decay and volatility changes. When it came time to put this position on, I opted to use the stock rather than the calls, precisely because I did not want to deal with this problem and I did not want to pay the high time premium for longer term calls. Sometimes the stock is the right trading vehicle, rather than the options.

If you have been following this column, you will notice that I am a net seller recently (other than the CME). I am concerned that we are near resistence in the major indexes and I have no intentions of giving back my profits. I am trying to stay lean and mean right now. If the market starts another big up move, I have cash to put to work. If it begins to correct, I have very little to sell.

Given that I am expecting a large move, but am uncertain which direction it will be in, I am considering buying some option straddles. I am also considering simply buying a few puts on the assumption that we may get a September / October correction.