We all know that averaging down is a losing proposition: you throw good money after bad and increase your risk. Also, cutting your losses short is one of the most important rules of trading.
However, there is a strategy, using options and vertical spreads, that allows you to lower your break even point on a position that went against you. And to do it without increasing your risk.
If you own a call option and have an unrealized loss in this position, you can improve your chances of breaking even by "rolling down" into a vertical spread. You do it by selling 2 of the calls that you are currently long (the one that you own plus another one), and buying one call at the next lower strike, ideally for even money.

Of course, this strategy works in the same way for puts.

To learn more about the swing trading portfolio (strategy, membership etc.), please click here

- Optrader

Wow, what a week and it’s only Tuesday!

From record drops to record pops in one day is no way to run a market and it’s still a day trader’s paradise as what works one day is poison the next and vice versa.  This morning we started out looking for better than 20% bounces off yesterday’s drop and it didn’t take too long for us to get on track.  We started out cautious but it only took until 10:04 to decide we were on an uptrend as we noticed the big banks leading the charge and I called for covers on the SKFs.  We got a nice Consumer Confidence number an a better than expected Chicago PMI at 10 and by 10:13 our indexes were testing the 2.5% rule.

The momentum picked up at 10:18 when I saw on CNBC: "Now Kudlow is talking about what the Fed, FDIC and Treasury can do without Congress that I talked about above, this is going around and may give us some traction to the upside so watch out for those financial puts!"  That led to a very large amount of bullish trade ideas which obviously worked out on an up 485 day and we ALMOST started looking at full covers at 3:17 but, just 6 minutes later, we got the word the SEC would be changing the mark to market accounting rules which allowed us to be a little braver about tomorrow. 

We’re still worried about hedge fund redemptions causing an unwinding of positions buty that will be part of the very large wall of worry we will be dealing with all week, even after they pass (hopefully) the bailout package.  The Dow finished above my 10,800 target by 50 points, also a good sign but we’re not going to get too excited until we take back all of Monday’s losses, something that will really perk up our weekly chart of the S&P measured in Euros as the dollar made great gains today as well.

Looking at our Big Chart, things could certainly have been worse:

Well, not much worse - yesterday the sole green box in all of the world’s markets would have been the Russell, which held the line at 657.  That, my friends, is the proverbial abyss we stared into and may again if Congress is determined to repeat Monday’s madness.  It looks like a 66% drop was finally enough for the Shanghai, which bottomed out at 203 on the 18th and is up 17% in the two weeks since and is the only index to put in a positive week.

We still have a lot of work to do to take back our 25% levels and we’ll be looking to London and Japan to make up some ground tomorrow ahead of our open.  The S&P needs 20 points to earn another green box and that’s our best hope for tomorrow but the Dow MUST NOT cross that 10,644 line again as it’s a long, long way to the bottom that is being shared by the Hang Seng and the Shanghai at 50% off the highs (that would be Dow 7,000!).

In the morning post, we discussed the action in Ireland to bail out the banks as well as things the Fed and Treasury and FDIC could do without Congressional approval to improve the situation and today it seems as if the government is going to be doing pretty much all of them in some form or another.  The FDIC is also considering increasing deposit insurance limits from $100,000 to $250,000 which is very nice until you realize that the FDIC already insures $4.5Tn worth of deposits and has just $45Bn in the actual fund - Now that’s leverage!

"What we’re seeing, in general terms, is almost irrational behavior on the behalf of some consumers who are panicking," said Scott Polakoff, the senior deputy director at the Office of Thrift Supervision, which regulates savings and loans.

I still don’t know for sure that Congress will approve the bailout package, I still hear enough conflicting information to make me think it may not pass but plenty of things are being done and the markets were certainly encouraged today and there were no new bank failures (even WB gained 90% and NCC picked up 28%) so we’ll take what we can get, one day at a time for now….

Today’s tickers: VIX, CTX, POT, XLF, NCC, SOV, GD, AAPL, RIMM, C & BGG

VIX- CBOE Volatility Index – The failure of the house to pass the $700 billion bailout bill has sent stocks into freefall this afternoon. As a result shudders have been sent up the backbone of the financial system. Treasury yields have slumped to 3.66% from 3.80% last week, but the ugly impact has been delivered to the fear gauge, which at a reading of 46.16 is up some 33% on the session. The options market is reasonably busy, but it’s the character of today’s trading that is more important. The Oct 30 strike calls are most voluminous as the fear gauge easily takes out the recent 42.50 peak and so on to another 52-week high. Most of the 30,000 lot volume traded early in the session to either the mid or the bid price of around 3.10. The current bid on the same calls is 5.00. The same month 35, 37.5 and 40 strikes all appear to have been bought as investors look for higher strike prices as the VIX increases and maintains its vigor. At the January strike an investor has sold a previously unpopulated 55 strike call for a premium of 20cents.

CTX- Centex Corp. – Homebuilder Centex has dropped 10.3% today to $15.52 while put options at the money have been popular. At the October contract an investor appears to have ditched 10,125 lots at 80 cents while in the January contract an investor bought around 25,000 lots at 3.0. The trades could be related with prior open interest at least matching the size of the sold puts, while the January position appears to be fresh. The investor here is looking for Centex to decline below $12.00 by expiration (delta argues a one-in-three chance) or could be a hedge against a long position in the underlying. With share prices at more and more banks tending towards single digits, one wonders whether an investor isn’t predicting the same for the overlooked core problem.

POT- Potash Inc. With the financial bailout package unfolding before our eyes, the reality is once again a realization that the degree to which financial toxins have become entwined in the global body is greater than anybody guessed. The simultaneous failure of European financial institutions serves to remind us that other central banks and treasury officials elsewhere have some of their own nursing to do especially in light of the revelation that the alternative (for the U.S. economy) is not likely to be a pretty sight. The rally in the dollar coupled with the prospect of weakening demand has helped bury commodity prices. Shares in this fertilizer manufacturer have slipped 7.4% to $136.52 and stand well-off a 52-week high at $240 and change. Around 13% of open interest is in action today with a notable trade occurring in the December contract at the 170 strike, where 4,800 lots appear to have been sold at a premium of 9.90 per contract. The calls have a 35 delta inferring a one-in-three chance of landing in the money within three months. Elsewhere the October 130 puts appear to have been bought in defense of further reckless share price declines, while there also appeared to be evidence of selling higher strike October calls as if a door was slamming firmly shut behind upside potential for this company’s share price.

XLF- Financial Select Sector SPDR – A 7.5% decline in the price of the key sector SPDR was a clear interpretation of events as investors sold stock in component financial stocks. However, the options activity was far more balanced with buyers and sellers keeping the put/call ratio at around a value of 1.0 indicating a more neutral picture. Even at the December 20 strike puts where volume rang up 38,000 lots by 12:30pm there was no discernible pattern to net. In the October contract the 19 strike calls were purchased while the 22 strike was sold. The 19 strike puts were bought while the 18 strikes were sold. In the November contract the 17 puts were sold while the 23 strike calls were sold. This lack of pattern makes interpreting today’s activity about as clear as mud.

NCC- National City Corp. - With a 52-week high of $27.21 shares of this regional bank are in free-fall today trading with a 46% los at $1.99. Fears that this will be the next victim of the credit crunch have taken a firm grip sending options volume to 76,000 lots before noon. Calls are trading at close to three times the put volume, which is most likely occurring as investors sell calls with the aim of buying back before expiration. The greatest series volume occurs at the October 2.0 strike where calls are changing hands at 50cents. Options are trading three-times as actively as usual.

SOV- Sovereign Bancorp –Shares are trading at two-thirds of Friday’s value at $5.55 while options traders have around 10% of the open interest at play in today’s session with 12,461 lots changing hands. The 5.0 strike puts in October and November are in demand trading at premiums of 1.50 each. The January 2.5 puts are trading at five-times Friday’s closing premium at 60 cents. Options are trading three-times as actively as usual.

GD- General Dynamics Corp – Shares in defense company General Dynamics are 1.9% lower today and stand at $73.47 although options volume of 8,296 lots is 3.75 times the norm. The October 80 and 85 puts both traded 3,000 times and we’re concluding that an investor is selling the deepest-in-the-money puts at the higher strike here and rolling down a strike to protect against a rebound in the stock. The existing positioning here was built at around 1.20 in early September and appears to have been sold today at a hugely higher premium of $11.60. At the time shares were trading at $91.22 and in the meantime options implied volatility has jumped as much as 68% to read 44.2%, helping buoy the price of the puts despite the passing time decay.

AAPL- Apple Inc - Broker downgrades citing a worsening of the spending environment are once again weighing heavily on shares at Apple Inc. where some 130,000 lots have traded in the first 45 minutes of trading. Apple’s shares have lost 13% already and stand at $111.22 while options trading is relatively balanced. Beneath $115 shares are at a 52-week low as puts with strikes from 130 through 80 are heaviest in volume at the October strike. Implied options volatility took off today rising 37% to 88% ensuring that not only does it appear on our options most active market scanner but also amongst our biggest volatility gainers. Historic volatility stands at 60%.

RIMM- Research In Motion – The Apple news confirmed last week’s not-so-rosy earnings from RIMM whose shares took a 25% haircut Friday. Today they are lower by a further 9% to $64.40 with options volume right up there on the heavily traded leader board. Implied volatility at 94% is off to the races as uncertainty on the outlook becomes impaired. Thanks to the second day in a row whereby the stock is making a fresh 52-week low, historic volatility on RIMM has now broken above 100%. 77,000 options are in play in early trading.

C- Citigroup Inc – Despite a bailout package resolution confidence in the financial system is waning. Over the weekend Citi agreed to takeover Wachovia, which according to the regulator “didn’t fail.” However, Citigroup announced a halving off its dividend in order to preserve capital and its shares are down 1.3% to $19.84. Options volume is heavy at a total of 116,000 lots with puts at the December 20 strike most popular. Here options are trading at a premium of 3.15 indicating an expiration price of the shares at $16.85.

BGG- Briggs & Stratton – An investor sold 5,000 calls at the October 20 strike for a premium of 20 cents. Shares are 1.8% lower at $17.45 today and have rebounded from an $11.00 low since July. They are, however, on the decline after the capitulation of the rally, which saw them as high as $21.51 last week. There is only a small amount of open interest in this stock where 12,590 lots of open interest is at play. Today’s sale could be one of two things. The volume is slightly above the existing stake at this strike and could be a closing position.

We all know that averaging down in a losing proposition: you throw good money after bad, increase your risk, and cutting your losses short is one of the most important rules of trading.
However, there is a strategy, using options and vertical spreads, that allows you to lower your break even point on a position that went against you. And to do it without increasing your risk.
If you own a call option and have an unrealized loss in this position, you can improve your chances of breaking even by "rolling down" into a vertical spread. You do it by selling 2 of the calls that you are currently long, and buying one call at the next lower strike, ideally for even money.

Of course, this strategy works in the same way for puts.

To learn more about the swing trading portfolio (strategy, membership etc.), please click here

- Optrader

We’ve had improvements in the pre-market but do not be easily led into temptation.

It is very normal to get a 20% bounce off a harsh drop, while that would give us 150 Dow points and 40 Nasdaq points and 20 on the S&P, that is nothing to get excited about.  Anything less than a 40% recovery is pretty much a continuing downtrend.  The last play we looked at yesterday, at 3:43 was a speculative bounce play on the QQQQ $38s at $1.69 but, as I said to members at 11:20 yesterday (with the Dow was still up over 10,800) when we were still looking for bearish plays: "Technicals on all the indexes say we are doomed and TA has been very good at predicting lately.  If this bailout doesn’t give us traction soon, we probably are doomed so don’t go too crazy on the long side, I’d have to say that calls are still the speculative plays as the preponderance of evidence is against them."

We had our clue to worry from watching the VIX early in the morning and at 10:48 I had noted: "Looks like the market is not done going down and the VIX is up high enough for us to get back to 10,600 or it may mean we are 200 points too far down already - tough call with all this negativity!"  The VIX is an excellent indicator of trouble brewing in the markets.  At the time I made that comment to members it was just touching 40, by the end of the day the VIX spiked all the way to 48, possibly an all-time high, which we then noted would make for some good puts on the index of course.

Our worry was that Congress would pass the bailout package but it would be perceived as not enough (the morning post was titled "Too Little, Too Late?" but it did not occur to us until the voting started that they would actually vote it down and, rather than "too little, too late" we got NOTHING AT ALL.  What did doing nothing cost us yesterday?  Well the markets lost $1.2Tn in market cap, something that has a pretty broad-reaching effect on America but nowhere near what it would be if we had gambled our Social Security Trust Fund on the markets.  Of course, now may be a good time to bottom fish with our $2.5Tn of inadequate coverage as things have not been cheaper since 2005 and if Congress does finally get it together and come up with a good plan, we may be able to roll a double with some savvy investments so let’s bust open that lock box and do a little speculating!

Pre-markets are holding up very well as hope does spring eternal that both the bailout will pass AND it will work if we miss either one of those two points, those SKF calls continue to be your best friend.  There are a lot of tempting values out there but it will be a while before we can claim to be out of the recessionary woods, even if the plan does pass AND it works so we need to look at very long-term positions, like the ones in our Trade Ideas section. 

My favorite at the moment is MSFT 2011 $22.50s, which closed at $7.38 yesterday and we are back about the price the stock was at before they announced a $40bn (about 20%) buyback last week.  MSFT may not be recession proof but, like oil, it’s a necessity that people consume every time they buy a computer (most anyway).  Earnings are on October 23rd and expectations are for a modest 5% increase over last year, far lower than prior trends.  With 27 months to sell calls against them, you only have to collect .20 per month in premiums to pay for the calls but back at $25, it pays to wait to sell the Nov $27s for $1 or better, now .40. 

These are the kinds of plays you can construct on any stock you feel is at a good bottom.  Of course, as I said, calls are the speculative plays in this market and need to be treated as such.  We are assuming a plan that works coming from our government to "fix" the markets - not exactly something you want to bet the farm on.  USUALLY, when the VIX is this high, it precedes a short-term market rally but it is no indication of a long-term turn.  The VIX tracks the implied volatilities of S&P index options and a high VIX means it’s a terrible time to buy options and a good time to sell them in general.  30 or more is generally considered high on the VIX, over 40 and we get what happened yesterday…

What’s happening today is Bush is speaking at 8:45 and the international markets are expecting good news as Asia was down far less than expected (from the FXI  action yesterday) with the Nikkei falling "just" 4.12% and the Hang Seng actually closing UP 135 points (0.76%) and the mainland markets were closed, possibly for the Jewish New Year…  The Hang Seng notably recovered from a 1,000-point gap down and went straight up all day ONLY on the hopes that Congress WILL pass a bailout package on Thursday. 

"Just as the casket began its descent, signs of life emerged in the Aussie market to claw its way back from 340 points down. Investors showed glimpses of optimism as sentiment was mirrored throughout Asia," said Martin Batur, deputy head of dealing at IG Markets in Australia. However, analysts weren’t willing to call a near-term bottom, and volume in many markets was low.  Government and central bank officials around Asia rushed to reassure investors they had measures in place to cope with the large market volatility. Overnight, several Central Banks stepped up their coordinated liquidity provisions to try and keep credit markets pumped with cash and borrowing costs down.  Bear in mind this is how our global markets are performing with unprecedented amounts of Central Banks support - if we have a good couple of days, we should consider it an opportunity to take on some more put plays and gold is still a great hedge as the world is awash in new capital being created by CBs at a record pace.

Europe is also staging an afternoon comeback (8:30), also on rumors that yesterday’s disaster in Congress was only a bump in the road that will be fixed on Thursday.  The EU is overhauling banking regulations in actions that will affect our own international banks including "changes that include creating groups of national regulators to supervise banks doing business across national borders."  Europe’s 15 biggest listed banks by market value held 24% of their assets in European countries outside their own, up from 11% in 1997.

Bankers have decried the new proposals, saying they will increase the price of raising debt and kill off a market already hit by the credit crunch.  But critics of the current system say the weekend’s rescues offer little comfort. "Nobody should draw too many reassurances for other cases," says Wim Fonteyne, a senior euro-zone economist at the International Monetary Fund.

Another factor driving the European markets this morning is huge speculation that the Fed will make an emergency rate cut.  Our Fed already dumped another $600Bn into the markets yesterday morning and the ECB has a rate decision coming on Thursday and is also expected to capitulate and cut rates.  Ireland stepped in and announced they would, for the next two years: "guarantee all deposits, covered bonds, senior debt and dated subordinated debt of the four main banks."   This, of course, was a huge relief to that sector and sent their market flying - something the US could have done at any time.  The finance minister said the market has been making "severe judgments" about Irish banks. "We are in the eye of the storm … It’s time for swift and decisive action," he said, adding that Irish banks will be subject to tighter regulation.  The guarantee will be financed through a commercial charge for Irish Banks.

Bush at 8:45:  "I assure our citizens and citizens around the world that this is not the end of our legislative process…  It does not matter how we get a law, what matters is that we get a law… that allows our country to get moving again…  The reality is that we are in an urgent situation and the consequences will get worse each day that we do not act…  If our nation continues on this course, the economic damage will be painful and lasting.   The drop in the stock market yesterday represented more than $1Tn in losses and (the bailout) would ultimately cost far less than $700Bn…  Congress must act!"

So, keep in mind that governments are doing everything they possibly can to prop up the markets.  As I said a couple of weeks ago, this is very much like the government throwing sandbags behind the totally inadequate levees in New Orleans ahead of hurricane Katrina - it may look like they are doing something but if the storm hits us, all these efforts will quickly wash away like sandcastles in the tide.  Paulson and Bernanke are right, the time to act is well before you are engulfed by the crisis but that time may have passed a long time ago as those same men were assuring us as recently as July that the markets were sound and the economy was strong.  Is this the right plan?  Probably not but, like throwing sandbags at the levee and hoping it will hold, it’s the only plan we have with the waves coming straight for us.

TBoone’s BP Capital fund got caught in the wave that washed out the energy market and he sounded downright depressed this morning on his CNBC interview and, like everyone else, he is pinning his hopes on the bailout package, mentioning Buffett said to him if Congress doesn’t act, we may be looking at a 2,000-point drop in the Dow (presumably from 11,000). 

Meanwhile, home prices continue to head lower - dropping at a record pace in July and, now that Congress has failed to act, the threat of massive layoffs loom for corporate America.  Without Congressional approval on the bailout, the Fed will be forced to cut rates and oil is already moving up on that premise and rates are already down from 5.25% to 2% yet mortgages have only gone down from 7% to 6% so all this has been doing is saving the banks from collapse, it has done nothing for the taxpayers who subsidize these low rates through deficits and inflation, no wonder Ron Paul is so pissed…

The FDIC can bail out banks without Congressional approval but it would be seen as circumventing Congress.  "There’s really expansive authority for the FDIC to prevent systemic risk," said Michael Bradfield, a partner at Jones Day and former Fed general counsel. Waiving the usual FDIC procedures could "make banks willing to lend to one another, if they knew that regardless of who they lent to they were going to get bailed out if that bank failed."  The Fed could broker more deal like they did with BSC, where they tossed in $30Bn to make the deal palatable for JPM and they can also undertake "emergency asset purchases," also side-stepping Congress.

The Treasury could take other incremental steps to help mitigate the crisis, including further expanding its program to buy mortgage-backed securities issued by Fannie Mae and Freddie Mac. The new program, created during the government’s recent takeover of the companies, has already doubled to buy $10 billion of MBS backed by Fannie and Freddie.  The Treasury could also turn to a Depression-era fund to find money for loans or loan guarantees to financial institutions. The Exchange Stabilization Fund has about $50 billion in it, and the Treasury could use that money to backstop financial firms. However, it’s a small amount, compared with the $700 billion the Treasury said it needs to stem the problem.

So we will see what happens but, although it is tempted to call a bottom, just remember we are almost 1,000 points below the 50 dma at 11,352, so it’s not likely we’ll miss too much be being a little cautious at this stage.

Today’s tickers: POT, XLF, NCC, SOV, GD, AAPL, RIMM, C & BGG

POT- Potash Inc. With the financial bailout package unfolding before our eyes, the reality is once again a realization that the degree to which financial toxins have become entwined in the global body is greater than anybody guessed. The simultaneous failure of European financial institutions serves to remind us that other central banks and treasury officials elsewhere have some of their own nursing to do especially in light of the revelation that the alternative (for the U.S. economy) is not likely to be a pretty sight. The rally in the dollar coupled with the prospect of weakening demand has helped bury commodity prices. Shares in this fertilizer manufacturer have slipped 7.4% to $136.52 and stand well-off a 52-week high at $240 and change. Around 13% of open interest is in action today with a notable trade occurring in the December contract at the 170 strike, where 4,800 lots appear to have been sold at a premium of 9.90 per contract. The calls have a 35 delta inferring a one-in-three chance of landing in the money within three months. Elsewhere the October 130 puts appear to have been bought in defense of further reckless share price declines, while there also appeared to be evidence of selling higher strike October calls as if a door was slamming firmly shut behind upside potential for this company’s share price.

XLF- Financial Select Sector SPDR – A 7.5% decline in the price of the key sector SPDR was a clear interpretation of events as investors sold stock in component financial stocks. However, the options activity was far more balanced with buyers and sellers keeping the put/call ratio at around a value of 1.0 indicating a more neutral picture. Even at the December 20 strike puts where volume rang up 38,000 lots by 12:30pm there was no discernible pattern to net. In the October contract the 19 strike calls were purchased while the 22 strike was sold. The 19 strike puts were bought while the 18 strikes were sold. In the November contract the 17 puts were sold while the 23 strike calls were sold. This lack of pattern makes interpreting today’s activity about as clear as mud.

NCC- National City Corp. - With a 52-week high of $27.21 shares of this regional bank are in free-fall today trading with a 46% los at $1.99. Fears that this will be the next victim of the credit crunch have taken a firm grip sending options volume to 76,000 lots before noon. Calls are trading at close to three times the put volume, which is most likely occurring as investors sell calls with the aim of buying back before expiration. The greatest series volume occurs at the October 2.0 strike where calls are changing hands at 50cents. Options are trading three-times as actively as usual.

SOV- Sovereign Bancorp –Shares are trading at two-thirds of Friday’s value at $5.55 while options traders have around 10% of the open interest at play in today’s session with 12,461 lots changing hands. The 5.0 strike puts in October and November are in demand trading at premiums of 1.50 each. The January 2.5 puts are trading at five-times Friday’s closing premium at 60 cents. Options are trading three-times as actively as usual.

GD- General Dynamics Corp – Shares in defense company General Dynamics are 1.9% lower today and stand at $73.47 although options volume of 8,296 lots is 3.75 times the norm. The October 80 and 85 puts both traded 3,000 times and we’re concluding that an investor is selling the deepest-in-the-money puts at the higher strike here and rolling down a strike to protect against a rebound in the stock. The existing positioning here was built at around 1.20 in early September and appears to have been sold today at a hugely higher premium of $11.60. At the time shares were trading at $91.22 and in the meantime options implied volatility has jumped as much as 68% to read 44.2%, helping buoy the price of the puts despite the passing time decay.

AAPL- Apple Inc - Broker downgrades citing a worsening of the spending environment are once again weighing heavily on shares at Apple Inc. where some 130,000 lots have traded in the first 45 minutes of trading. Apple’s shares have lost 13% already and stand at $111.22 while options trading is relatively balanced. Beneath $115 shares are at a 52-week low as puts with strikes from 130 through 80 are heaviest in volume at the October strike. Implied options volatility took off today rising 37% to 88% ensuring that not only does it appear on our options most active market scanner but also amongst our biggest volatility gainers. Historic volatility stands at 60%.

RIMM- Research In Motion – The Apple news confirmed last week’s not-so-rosy earnings from RIMM whose shares took a 25% haircut Friday. Today they are lower by a further 9% to $64.40 with options volume right up there on the heavily traded leader board. Implied volatility at 94% is off to the races as uncertainty on the outlook becomes impaired. Thanks to the second day in a row whereby the stock is making a fresh 52-week low, historic volatility on RIMM has now broken above 100%. 77,000 options are in play in early trading.

C- Citigroup Inc – Despite a bailout package resolution confidence in the financial system is waning. Over the weekend Citi agreed to takeover Wachovia, which according to the regulator “didn’t fail.” However, Citigroup announced a halving off its dividend in order to preserve capital and its shares are down 1.3% to $19.84. Options volume is heavy at a total of 116,000 lots with puts at the December 20 strike most popular. Here options are trading at a premium of 3.15 indicating an expiration price of the shares at $16.85.

BGG- Briggs & Stratton – An investor sold 5,000 calls at the October 20 strike for a premium of 20 cents. Shares are 1.8% lower at $17.45 today and have rebounded from an $11.00 low since July. They are, however, on the decline after the capitulation of the rally, which saw them as high as $21.51 last week. There is only a small amount of open interest in this stock where 12,590 lots of open interest is at play. Today’s sale could be one of two things. The volume is slightly above the existing stake at this strike and could be a closing position.

Well we seem to have our bailout package but it also does not seem to be helping.

Pre-market trading (7am) is down considerably but it’s possible that there is still some worry as the package has not yet been voted on but the selling is a bit overdone.  As it stands now, the bailout program (now renamed the Emergency Economic Stabilization Act of 2008) will provide $250Bn immediately, $100Bn more if the President decides it’s necessary and $350Bn subject to additional Congressional approval.  The bill expires on Dec 31st, 2009 and assets are to be purchased at "market value," whatever that is. 

Another thing hammering the financials is a provision that a broad-based fee will be assessed, apparently against the whole industry, to pay for any lossess incurred by the government in funding this bailout, oops, Stabilization Act.  The government also gets warrants to participate in the upside for the financials but, between that and caps on compensation, well-capitalized firms will have little reason to participate so we can expect our warrants to be coming from the dregs of the dregs of our financial markets.   

The Treasury will also establish an insurance program to cover losses with a risk-based premium also paid by the financial industry - another scary cost for the financials.  We should be retesting last week’s lows today but, if we survive it, I’m actually thinking we may have a short-term bottom here, well called by Warren Buffett last week.  WB has no bottom and the two bidders that are possibly going to prevent this country’s 3rd largest bank failure ever (all this year) are down to C and WFC and it looks like they are not willing to pay very much after seeing how cheaply JPM got WM last week.  I don’t see WFC as being able to absorb the potential losses so look for C to get a sweetheart deal for the bank.

Over in the UK, mortgage lender Bradford and Bigley has failed and will be taken over by the Treasury as a crisis of confidence, more so than debt took them down very quickly.  "The Treasury with the other tripartite authorities, acting in their respective capacities, sought a range of private sector solutions before taking this action," the UK Treasury said Monday. "However, with its financial advisor, HM Treasury concluded that this option best delivered its objectives of maintaining financial stability, protecting consumers and protecting taxpayers."  Europe is down about 3% this morning.

Also in Europe, the governments of Belgium, Luxembourg and the Netherlands combined to pay $16Bn to Fortis, Belgium’s largest retail banks in return for 49% of the company.  Fortis must now sell their stake in ABN and that is now driving down ABN partner RBS on fears the fire sale by Fortis will devalue that asset - see how everything is connected!  The ECB and other Central Banks continue to pump tens of Billions into the markets on a daily basis, trying to shore up the financials around the world and maintain some semblance of liquidity.

On the bright side, NY Investment firm, JC Flowers, has raised $2.5Bn from investors to form a buyout fund that will target banks and other financial firms in a bottom-fishing expedition.  Flowers wants to “take full advantage of the blood in the streets,” said Michael Holland, chairman of Holland & Co. in New York, which manages $4 billion of assets. “He had a coup in Japan and is going to visit similar opportunities in the U.S.”  Flowers was part of an investor group that bought Long-Term Credit Bank of Japan Ltd. for 121 billion yen ($1.1 billion) in 2000, renaming it Shinsei. The group sold two-thirds of the company in 2004 for 532 billion yen. David Rubenstein, co-founder of the Carlyle Group buyout firm, hailed it as perhaps the most successful private equity deal in history.  Let’s hope Flowers is once again calling the bottom correctly.

Asian markets are way down with the Hang Seng dropping 4.3% and the Nikkei falling 1.3% after falling 300 full points from a good open.   Any improvement in the US markets today can be played by taking the FXP (FXI ultra short) puts but it remains to be seen whether the US markets will respond, even assuming the House does pass the bill today.  The dollar is going strong and China is pitching in by making moves to slow Yuan apprectiation, which has been up 6.7% this year alone. 

Adding more pressure on the US financial markets is a widening investigation by NY Attorney General, Andrew Cuomo, who’s ongoing investigation into short selling is now expanding to include the $54.6Tn credit-default swap market.  According to Bloomberg: "Cuomo is probing whether credit-default swaps were manipulated by short sellers to spread false rumors about financial companies such as bankrupt securities firm Lehman Brothers Holdings Inc. to drive down stock prices."  According to Anthony Carfang of Treasury Strategies, Inc.:  "You have a set of people doing this trade and they’re targeting one company at a time,” Carfang said yesterday in a phone interview. “When Fannie Mae goes under, they move on to the next target, which was Lehman Brothers, and now you see them in Wachovia and Morgan Stanley.”  Credit-default swaps on both Wachovia Corp., the fourth- largest U.S. bank, and Morgan Stanley reached record highs yesterday, suggesting investors are betting on a failure or hedging against losses.

9am:  It looks like C is getting the WB deal and clearly that marks them, along with JPM as REALLY too big to fail.  I’m liking Oct $20 calls as a gamble if C opens below $19.50 (now $19.25 pre-market) as well as the 2010 $22.50s for about $3 as a play on a long-term recovery.  We had a lot of speculative put plays on financials on Friday afternoon and if you do well on some of those, then picking up a couple of bullish calls is an interesting way to balance things out. 

Both MS and RBC dropped price targets dramatically on AAPL and that stock is getting hammered ahead of the open.  MS dropped their price target to $115 and RBC from $200 to $140 and if this is the kind of downgrades we are going to be getting on the best of tech companies, it will not be a pretty picture at all in the rest of the markets.  The Nasdaq was already on the ropes but with RIMM and now AAPL hitting new lows, that rope is clearly going around the neck of Tech in general.  If the Qs fail to hold $40 then look for QID (QQQQ ultra shorts) to really take off but the premiums are outrageous on the option side. 

One more bright spot is oil rapidly selling off, back to testing $100 this morning.  We’re going to need oil to head MUCH lower than that to help the consumers at this point.  Oddly enough, Personal Income was up 0.5% for August, much more than the up 0.3% expected and way better than the -0.7% we had in July.  Personal Spending, on the other hand, was 0%, lower than the 0.2% increase expected - another indication that consumers are tightening.  Tomorrow we get Chicago PMI and Consumer Confidence and that’s where we’ll end the month.

It’s going to be a rough one today, a Nasdaq breakdown will be very tough to recover from as it was our best hope for new leadership.  Let’s watch the Transports, who SHOULD benefit from lower fuel costs but are unlikely to be in a party mood today.  I’m looking for the Nasdaq Transportation Index to hold 2,100 and it’s a critical level while holding 2,200 will be mildly positive but It’s hard to be optimistic looking at this opening.