Technically the DIA looks poised to make a run for new highs. We liked the fact that we closed at Monday’s highs, which we consider to be the breakout level. We will be watching this level, 140.60 closely to see if the breakout is confirmed. We will also be looking closely at volume today and tomorrow. Yesterday’s rally was on exceptionally low volume, which is a concern. For the rally to really gain traction volume and participation will have to increase. Another risk to the rally is bearish news flow over the sequester which is set to begin tomorrow. Because of these risks we are playing the breakout with out of the money call options to keep risk limited in case we are wrong and the market sells off.
Yesterday as the Dow broke out to new highs the biggest trade of the day went up as one trader bought 600 March 141 DIA calls for 1.06. Oh wait, that was us. As the market gained momentum yesterday we decided to added some fixed risk upside exposure for clients to take advantage of a possible breakout in the Dow. We liked what Bernanke had to say, which was basically that easy monetary policy is not going anywhere anytime fast. We don’t like to fight the Fed, and if interest rates are going to continue to stay low risk assets will continue to appreciate. As if to prove this the New York Fed stepped up yesterday and made their largest asset purchase yet this month. Yesterday the VIX crashed down nearly as fast as it had gone up just days before, which shows just how fast Bernanke was able to remove the fear in the markets. A low VIX also means that option premiums are lower, which makes buying call options more attractive.