Posted by: jhamon | March 10, 2010

MysteryHedgie: The Risk Manager Reflects

Order flow observation…as this morning’s gentle squeeze higher continues, led again by C’s trading through $4 as we thought likely in yesterday’s note, we have seen consistent sellers of “teenie” puts (so named after when options used to trade in sixteenths)… predominantly IWM March and April and XLF March and April, the leaders of this last rally leg.

While there are as yet few signs of imminent reversal (C’s inability to close above $4 today could be one such sign) selling this type of put options for scant income seems to disregard all the lessons learned from 2007-08.

The risk manager in us wants to take note of March’s tendency for market turning points, especially 2000, 2003 and 2009. With VIX 17, bond and gold and oil options similarly cheap, optionality makes sense….

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