Game of chicken dominates the ST

I decided to bail on my FXC puts this afternoon that I bought Friday for a few reasons. First I should say that the fxc put was a play to profit on expected ST market downside. Since the Canadian dollar is considered to be a "risk on" currency it will rise and fall along will the general markets. Why the dollar and not just buy puts directly on the market itself? Good question. It's because I figured I'd get more bang for my buck with fxc puts vs say SPY puts given the option pricing and where my downside targets lied. There was the risk of unfavorable tracking error by going with the FXC puts but I was willing to accept that risk.

I bailed because, although there were signs of an immanent ST drop on Friday as per my comment on stock twits, new evidence appeared to me to suggest such a drop could be delayed. First was the yet again too obvious sell-off at "resistance". The market reversed off the 1425 level which marked the YTD high in May forming a downside reversal. The bagholding permabears over at the message boards got really excited over this and were really excited about the messily 5 pt drop in the futures overnight. So pathetic. This was a sign to me that there were still too many bear bagholders who needed to capitulate and perhaps I would be premature or flat out wrong about my expectations for ST downside. But I was willing to give the bears a little leeway here given that the market was not overbought. As a ST bear,  I was quite disappointed with today's action even prior to this afternoon ramp into the green. If yesterday was indeed a true reversal we should have seen the market go down hard today without giving traders any convenient downside entry points. Instead, it drifted modestly down with a pcr in the 90's (not what you want to see if you want downside). Come afternoon, my patience was just about finished. After the fed minutes we a saw a few whipsaws and then grinded back into the green but just before that ramp I dumped my puts. The bid/ask spread was terrible and I got dinged because of it. Anyhow, I knew that given the liquidity of these option, I would get dinged by the spread if I decided to close out the trade early so I'm not complaining. 

Now, I know that my decision to bail could easily prove to be a hasty one but when you're top picking using front month options, it's a very dangerous game and one that you should avoid most of the times. You have to not only pick a top which is hard enough, but your timing has be near perfect too. If you were right in calling the top but the market goes sideways for a few weeks before finally falling, you still lose. So, if you have any doubts you have to bail and that I did.