Condor Options

Today’s rally was nice and all, but where’s the volume? QQQQs traded 195 million shares today, which isn’t spectacular by any means and is less than Friday’s trading. Volume in the other indexes was similarly unremarkable. So a lot of this may have been short covering, and how much was just short covering will be evident over the next few days.

The chart at right shows the last four Fed interventions, courtesy of the excellent WSJ Marketbeat blog. It’s hard not to notice how each of these actions has sparked a modest rally (or not) which is met before long with more intense selling. Today didn’t buck the trend, and now that all the indexes are starting to push into short-term overbought levels, we should see the same drama play out again over the next week or so.

We noticed that today’s Striking Price even manages to get “Put” and “the Fed” within seven words of each other:

Consider Citigroup. In recent months, the bank has attracted massive amounts of put buying — a sign of bearishness among options traders. Yet today, investors have reversed course and are selling April 20 puts with the stock recently at about $20, presumably closing out bearish positions and preparing for the stock to advance.

So far, more than 40,000 April 20 puts have traded. The switch from buying puts to selling puts is arguably illustrative of a somewhat bullish mood — at least today, and it could change tomorrow or even by day’s end — toward financial stocks.

Put sellers could conceivably be betting that the Fed’s actions will provide some support for some financial stocks and ease liquidity pressures. [link]

We’ve got small April and May spreads going and an open April position in our newsletter, but as this rally phase peters out, we’ll start to add to some short positions.

UPDATE: A must read note from Barry Ritholtz re: the Fed’s real motivations.  He’s been on this kick for awhile describing the constant bailouts and handouts to banks and brokers as not just a form of corporate welfare, but as market socialism (and not in the good sense).  We’re starting to think he’s right.

[tags] Fed, markets, puts, QQQQ, Bernanke, Bernanke Put, Citigroup, newsletter [/tags]