Okay just for the sake of asking the question... If the COT numbers do go negative tomorrow , giving a short signal, or for that matter everytime they change... what length of option do you buy? 90-120 days? or in this case would you go for a Dec 04 or Dec 05?

Thanks,
Heath

Heath, I hope it is more than "just for the sake of asking the question," because if they flip tomorrow you need to have a plan.

I will probably buy mostly slightly in-the-money puts and I will emphasize the QQQ and SPX LEAPS - Jan '04 and Jan '05.

You never know how long they will stay with a market bias. Sometimes it's just for a week. It has been as long as about three years. If you took an average, I think it's about four months. But I think it's best to assume that you'll be in the position for at least several months.

Larry

If I bought an Jan 04 Put and the COT was still short... when would I think about selling my put and buying another put leap? (30 days before, like december?


Heath

Heath,

It depends on how much time value is left in whatever option you buy. If the option is deep in-the-money, there will be little time decay (theta) to worry about, so you might as well hold it until expiration before you roll it over into a more distant month.

But if there is time value left in the option, you probably want to roll it over one month before the expiration date because time decay accelerates in the expiration month.

Larry

But you'll only being going short if the COT goes short by 51%, correct?

No, not necessarily. If you’re referring to the 51%/49% approach that I wrote about in the SMR, I just did that to give people some choices. I don’t enter markets in a strict, mechanical manner. I’ll enter a little at a time over several days. One thing is for sure – if and when they flip to net short, even if it’s by a small amount, I’ll liquidate my longs.

Larry