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June 17, 2005
Market Meltdown: Cherniawski at Financial Sense
Keep in mind that today is June options expiration:
Last month, Anthony Cherniawski published an article titled "Market Meltdown" at the Financial Sense website, that argued for a global stock market downturn. In addition to Ellitt wave counts, the author looked at the volume of open interest for out-of-the-money puts on the SPX and the dollar volume of short trades that should be placed in order to adequately “delta hedge” the exposure of the sellers in the June put contracts.
The author proposed that automatic delta-hedging trades, commonly used by hedge funds, could lead to a cascading effect, should the S&P violate the 1175 and 1160 support levels, and lead to a drop below 1100.
And yet another scary thought: One of the talking heads on CNBC stated that one of the largest brokerage houses was recommending that retirees sell naked puts to increase their income from their investment portfolios.
Of course, with the S&P trading above 1215 today, the market meltdown didn't materialize.
PS: In Market Meltdown Part II, Cherniawski reports on why portfolio insurance was deemed to be reponsible for the Oct 1987 crash. For those of you (us?) selling naked puts, this is a worthwhile read!
Posted by galatime at June 17, 2005 12:59 PM