Andrew Keene: I'm Long and Bullish Because the Paper Is Long and Bullish

Andrew Keene, an independent trader as well as president and founder of KeeneOnTheMarket.com, spoke with Benzinga Radio about the strong start equities had in 2012 yesterday and told us a bit about a trading strategy he's been utilizing recently that centers on unusual option activity. What are your thoughts on the big gap up we saw in markets to start the U.S. trading year yesterday?

It was interesting to me, with the huge gap up higher on the first day of the year that we didn't see more of a range. We've seen these tighter ranges. The VIX being at such a low level relative to what it was in 2011 means we are seeing smaller ranges in the S&P 500 futures, and we're not seeing as big movements intraday as we have seen in the past. We see a little bit of a selloff today, but I continue to stay bullish. I think if we stay above the 200-day moving average, then we can be off to the races. We have Alcoa, the first Dow component to report earnings, on January 9. As long as we don't get any terrible news from the European debt crisis, I think we are going to rally through earnings. 75 percent of companies reported good earnings and beat last time, and I think we will continue to see strong earnings this year.

Does the mood in the market reflect the solid performance we saw to open the year?

Right now, the European debt crisis is kind of on the back burner. We are looking for reasons to get long the market. To be honest, everybody wants to be long the market. Everybody makes more money when the market goes up. The hedge funds are generally long. January is historically an indicator for the rest of the year. Election years are also very strong, usually. If January can be a strong month, then 75 percent of the time, the market will mimic what happens in January.

Will we continue to see the volatility in the year ahead that we witnessed last year?

The VIX has two principles. The first one is uncertainty. In general, the higher the VIX, the lower the market is. The second one is the percentage move of S&P futures in a 30-day range. So, when we are making one-percent moves every single day, regardless of if we go up or down, that's a huge amount of movement, and people want to own premium--they want to own gamma. Right now, I want to sit on the sidelines with the VIX. If it pops up to 30, I want to be a seller. If it gets down to 15, I want to be a buyer--I think 15-17 is a floor on the downside. I don't see it really spiking above the 30 level because it took so long to try to get through that level to the downside. What is support becomes resistance.

Tell us a bit about KeeneOnTheMarket.com. How did it get started?

I was an independent trader on the floor of the CBOE for ten years. The floor used to be the first place where everyone would take their option paper, because that was the only place you could make a trade if you wanted to get it done. Now, it's the last place. Every order that comes to the floor gets shopped around to the big brokerage firms first. So, with the price that I was paying to be on the floor, there was no reason for me to be there. I left the floor and now, I'm trading upstairs. I wanted to start a financial blog to teach other people how to trade and how to read customer paper. There is a lot of customer paper that comes in, and people don't understand it. A lot of customers lose money because they are confused about how to read paper.

Equity options are your specialty, correct?

Yes. The one thing I've emphasized for the last six months is unusual option activity, which has treated me well. There are about 8000 stocks, and it's hard to realize how a customer trades every stock, but if a customer comes in to sell 30,000 puts in some stock, there's probably a good chance that the stock is not going to go down. If they buy calls, it might be a little different, because that could be against a stock position. Unusual option activity over the last six months has been a great indication of where equities will trade. I also work with a CMT, and we look at the charts on every trade we put on, and we analyze the charts to where we think the pattern is going to go. Even if there is unusual option activity, we don't necessarily make the trade unless the chart lines up as well.

You are pretty bullish right now, no?

Yes, I'm bullish on the market, and most of my stocks are commodity-based. I am long a bunch of calls in gold-based stocks--GFI, KGC, GDXJ. I'm short a put spread in VALE; I'm long JAG. I look at what the unusual option activity is doing, and I try to get on the side of big money. All of these trades are public information. The reason I'm long and bullish to a degree is because the paper has been long and bullish. I've ridden this thing up since 1200, so I've taken off profits along the way. I'm not sitting here holding a long position forever. I am taking off profits in stocks every time they go up. Yesterday, I took a good percentage of my profits off, and I'm less long than I was the day before.