Shop Till You Drop

• Posted by Adam Warner
• on December 3rd, 2009

While I’m OK with holding longer term options for a directional play, I’m rarely big on holding shorter term one’s. I’d need to really have an opinion that they underprice current volatility, and I’d honestly be more likely to feel that way at higher prices than I would wallowing here.

But I don’t mind *sort of* owning upside near term gamma in a name that’s breaking out. Like EWZ I mentioned yesterday, and AMZN.

I say *sort of* because I put on a simllar play in both. I bought ATM-ish calls (now ITM in both) and shorted stock on a ratio. That get’s me long gamma around here. But I also shorted OTM puts to somewhat offset the cost of the calls, so I’m not completely long gamma. I can short more stock into strength, but I have to tread a little more carefully buying stock into weakness.

So what’s my thinking?

My general theory on volatility is that I want to own it when stocks are hitting new levels, short it when the stock is covering ground it’s traversed recently. Volatility (we’re told) moves inversely to stock price, so rallies should see dips in volatility. Except when they don’t. AMZN to me is picking up some real momentum here, so I made a low octane bet that volatility will increase into it. And(or) will do nothing if AMZN fails and drifts lower. My two best case events are a strong lift or a slow drift.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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