Strangle the Bailout Vote

Bloomberg just announced the Senate will vote tonight on the Bailout. If you are interested in an article that expresses why I personally think the proposal is a bad idea -- read this. Regardless, with the imminent volatility ahead, today would be a good day to set up a Strangle (no pun intended!) Here is how the setup will work.

I'm going to choose CME because its price will be directly effected by tonight's vote, and it also made a large, $70 move on monday during the first vote -- let's expect history to repeat itself.

The strangle is simple -- let's not overcomplicate it. Basically you are placing 2 simultaneous trades, one for either direction of market movement. A slightly out of the money Call and Put are purchased with the same expiration date and underlying asset. CME is currently trading at $390 as I write this, so I will be purchasing the $400 Call and the $380 Put. When I wake up tomorrow and find out which way the market is headed, I'll close the "wrong" position for whatever is left of it, and go to the bank on the profitable one.

DANGER: The significant problem here is that the Market Makers know that huge volatility is ahead and they are inflating the options right now. You can see this inflation in several areas: the size of the spread is $2 or more right now, Implied Volatility is well over 70, and the Delta for these OTM options is below 50. The question is, will the move be significant enough to still be profitable -- this is why they make virtual accounts, to test our skills!

Time to Bail Out before the Bail-Out?

If you listen to CNBC, Henry Paulson, President Bush, even your local radio station you might be tempted to throw your hands in the air for in their terms clearly "the economy is collapsing." Personally, I call their bluff because I truly believe capitalism is superior to socialism and although the road may be bumpy and difficult for a little while, our economy will correct. There is our fundamental difference, I see the economy correcting itself, they see it collapsing. Another word they fail to recognize is "consequence." Indeed there are consequences to certain economic behavior -- we are a country that is accustomed to spending more than we can afford, and our government sets the standard with our nearly 10 Trillion Dollar debt. Unfortunately, the consequences of those decisions are now on our doorstep. I could go on for quite some time but I would rather discuss how this needs to affect our trading strategies for this week

I actually closed the majority of my bearish positions Monday as most of my picks rushed toward solid support ground -- I'm sure Jeremy will be discussing this so I don't want to steal his thunder. Normally I would wait for confirmation of support and begin looking Bullish again. Unfortunately, the market is relatively unpredictable right now -- largely waiting for a re-vote on the Bail Out on Thursday or Friday. So personally, to keep myself from getting bored and to stay diligent with my homework, I have elected to focus on very short term, even day trades through this week. With the amount of attention and volatility the market has right now this is a perfect time to apply your technical analysis to intraday charts at 5 min. intervals. However, be prepared in your strategy for news driven volatility when congress revotes on the Bail Out toward the end of the week.