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TFC Commodity Trading Forum

Wall Street's Friday Lunch Options

Chris Tyler, Optionetics.com
December 31, 2010

Officially open-for-business signs are finding bulls out of the office as a “lil’ schnitzel” is removed from 2010’s banner Santa Claus Rally, quarter and year-long performance. As of 10:55 ET the SP-500 (SPY) is flat for all intents and purposes but still supplying plenty “2011 can’t get here soon enough”, difficult-to-handle and “VIX’ing” price behavior.

With nary an economic report or corporate confessional, the question of “Why bother?” might be posed. I’m referring to why US markets are open on New Year’s Eve when typically there’d be an official three day sojourn away from flashing green and red tickers such as “BULL” “AT” “WORK.”

The reason behind one final session in 2010 versus an official three day’er is according to the powers that be at the NYSE; the show must go on when the Friday preceding a Saturday holiday also represents either an end of month, quarterly or yearly accounting period. In the case of 2010, the auto-pilot programs are observing all three.

In those often intertwined markets of notice, the final day of the year is a slightly unusual one in that somewhat strong flickering red and green lights are going unnoticed by the broader averages.

The US Dollar (UUP) is under pressure by -0.85% after gapping below the key 50SMA which has supported the currency proxy for more than a month’s time since putting in a bottom.

Dollar denominated commodities such as COMEX Gold (GLD) and silver (SLV) appear to be benefitting from the slip in the Greenback with both instruments up a bit more than 1.0%. On the other hand, an inflation and “death to the dollar” sensitive / sympathetic of late treasury market is finding a bit of unusual strength as well.

For its part, the highly-liquid iShares 20-Year (TLT) is up 0.85% as it tries to reverse nearly three weeks of loose technical toiling around its 78% Fibonacci retracement level from its April YTD lows to October highs.

Finally and in technical news, due to a session unremarkably void of headline catalysts; DryShips (DRYS) is hauling up gains of 2.75% on heavier-than-average volume. The dry bulk shipper’s stock appears to have found technical support from a pullback into a key area combining a gap fill, 38% Fib level, 50SMA and lower Bollinger Band within its nascent uptrend.

After striking fresh lows this year and essentially finishing flat to down fractionally in 2010, shares of DRYS may prove to be a more seaworthy vessel for bulls in 2011. In those sometimes accurate heat-seeking option markets, a few bulls appear to requesting passage in DryShips.

Calls are being booked at two times the rate of puts and total volume of nearly 16,000 not far removed from its daily average of 20,000. DRYS out-of-the-money January 5 put are actually seeing the heaviest activity on volume of 2,800. However, with open interest of 27,800 and priced at $0.08 per contract; it’s not the sort of warning that mandates jumping overboard.

For the bulls, January surrounding 5.5 and 6.0 money calls has seen volume of 2,000 plus contracts apiece. Large open interest and mostly non-stirring implieds make it difficult to discern altogether what others are doing, though outright purchases for $0.25 or $0.10 per contract or a roll into the higher strike make easy sense and “cents” to appreciate.

Implieds, while mostly quiet on the session are very reasonably priced compared to premiums of the past couple months and relative to the underlying volatility in DRYS.

With prices relatively cheap, traders appreciative of a bullish “All Aboard!” technical signal might look to go out into spring or beyond when considering a call to purchase; as its made slightly more affordable than otherwise.

This strategist’s favored strategy, without “rec’ing or wrecking” of course, is a married put combination using the 4.5 or 5 strike put in conjunction with long stock and looking to leg into a collar after an anticipated leg higher in shares of DRYS.

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site