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Tuesday, November 29, 2022


Friday Flip-Flop

Was I too bullish?

I know I called a top Wednesday at 3:02 with the Dow at 7,502 with an skeptical alert to go 70/30 bearish but I may have made the mistake of getting bullish too early yesterday as we held 7,400.  At 12:11 I told members: "Done with being short now – back to 60/40 bullish!" since I saw no particular reason for the sell-off and we looked to be holding well above our levels.  Although it did look like we were going to rally into the close, there were three things that did, in fact freak out investors – two new and one old

The first thing was the House passing the Bonus Tax by a wide margin (328-93) indicating enough Republicans were on board that this may go through the Senate as well.  The bill would impose a 90% surtax on bonuses granted to employees who earn more than $250,000 at companies that have received at least $5 billion from the government's financial rescue program. The bonus tax, if approved by the Senate and signed into law, would be retroactive to Dec. 31, 2008.  This is simply outrageous and ridiculous – retroactive taxes???  Are they kidding? 

This is no joke to Wall Street who PRIMARILY compensate their people with bonuses as it makes sense – they can pay you more when things are going well and less when things aren't.  Since they don't know in advance whether or not it's going to be a good year, they have people work for bonuses which, in theory, means everyone's interests are aligned.   Not there are many things wrong with that sysem, there has been much abuse and bonuses got out of control in good times and, of course, when you reward people based on performance you encourage exactly the kind of "book profits at all costs and damn the consequences" behavior that wrecked Wall Street (and the nation) in the first place. 

[House Passes Bill Taxing Wall Street Bonuses]

Anyway, so agree or disagree with the law itself (and forget AIG as this affects most major banks now), the issue is the government passing retroactive 90% taxes on people who make more than $250,000.  If Russia or China did this we would consider it an act of war against capitalism and our investors would pull their money out of the country right?  Well guess what?  That's EXACTLY how we look!  Even more ridiculous (if possible), congressional aides stressed the new levy would be in addition to the existing tax system, both the regular income tax and the alternative minimum tax.

Union-backed protesters gather outside AIG offices Thursday in Washington.In addition to AIG – C, JPM, WFC, BAC, GS, MS, PNC and USB are affected. It is possible the FRE and FNM as well as GM will also be affected. The bills would kill Wall Street's ability to bounce back, said Gustavo Dolfino, who runs recruiting firm WhiteRock Group. "It's like they're throwing a grenade at the problem, hitting the good and the bad at the same time."  Members of the administration question whether the appearance of unpredictability by Congress gives potential investors the idea the government program is too risky. Already, many banks are wary of participating in the government's voluntary $250 billion capital-injection program. More than 200 banks have withdrawn their applications to receive government cash. 

Congress attaching strings after the fact is what's spooking them and once a bank or fund lends out the government money, they can't give it back quickly enough to avoid punishments for taking the money that Congress decides to pass later on that will affect them retroactively.  So what happens, the banks not only don't lend but they go out and borrow money to pay back the TARP and get the government off their back.  Since the banks are a better lending risk than most private exercise, they suck up all the available lending capital and grind the economy back to a halt.  Very bad!  85 of 172 Republican Congressmen voted for this bill – that is just shocking!

That was only one of three bearish issues yesterday.  I even made fun of the Europeans for selling off as the bears scrambled to take down the US markets (did you notice the uptick in negative news-flow?) ahead of expirations but I did not know that a UK Hedge Fund had collapsed.  Although it was a small fund, that coupled with the fact that Hedge Funds experienced $25Bn in withdrawals in February did not make for good business headlines in Europe.  Overall, hedge funds have lost about 1/3 of their assets from their peak in June of 2008.  “The industry has gotten smaller on both a regional and global basis,” said Rory Kennedy, chief operating officer of United Managers Japan Inc., a Tokyo-based hedge fund adviser. “Those still invested in hedge funds are by-and-large professional investors who are focused on the industry for the long term.”


The third freak-out for investors is the one I was betting against:  All this "shock" about how what the Fed is doing is inflationary and will devalue the dollar is even more ridiculous than retroactive taxes.  What on earth did people think was going to happen?  On Dec 12th, 2006 I wrote "Burn Dollars to Fight Gravity" where I pointed out that the appointment of Paulson to team up with Bernanke indicated the only possible plan the administration could be pursuing was to devalue the dollar to the point where we can actually pay off our debts.  Just last February I updated my 2007 post on "Inflation Nation" where I pointed out: "What would you really care if gas were $5 a gallon as long as the minimum wage was $15 an hour?"

So I was shocked that people were shocked about inflation and unaware that Europe had a good reason to panic and I still don't believe this idiotic bill will pass, despite Congressional evidence to the contrary.  So I went bullish and last night I was still fairly bullish (but cautious) as I updated our Buy List because jobs losses appear to be bottoming, Leading Economic Indicators are turning back up and the Philly Fed report showed a nice improvement.  GLW had good notes on glass sales and FDX, although lowering guidance, also said they saw a bottom and GE said that Whitney and Roubini's estimates of their problems are off by over 1,000% and if that carries through to other major lenders, then the Financials can be in for an epic rally.


Was I being too bullish or am I just being impatient?  Hard to say but that's where we stand at the moment.  I'm very disappointed that we failed to make our breakout levels (Dow 7,450, S&P 788, Nas 1,475, NYSE 4,950 and RUT 425) but we generally held our 10% levels (Dow 7,404, S&P 775, Nas 1,466, NYSE 4,839 and RUT 402)  and I was determined to stay bullish if we held them but not making our breakout levels today will have me questioning the week. 

I suppose the flood of media negativity is getting to me as well but I still stand by the premise that stocks are a commodity and, if you are worried about your dollars deflating in a bad economy you are still better off in equities than gambling on commodities (other than gold, which we love) as AAPL gets half their revenues from overseas as do most of the Dow and much of the S&P and that means they are collecting more and more dollars every day as our exchange rates plummet.  If the economy is dead, if we are in a global depression, then you can short stocks (but still, not in dollars) but if inflation is your concern, then shorting stocks makes no sense as selling inflated $300 sneakers will make NKE look like XOM did when oil was at $140 – you have to buy them!

Price inflation with wage inflation means people simply spend more money on things, whether they are food, commodities or stocks.  It means that borrowing gets expensive but debts shrink relative to earning power as time goes on.  This is how people who took home loans at 15% in 1980 survived – you can borrow $200,000 on a $240,000 house at 15% if your house is going up 15% in value every year along with your wages.  Let's say you earn $50K a year and can barely cover the $2,528 monthly mortgage.  That mortgage stays the same but next year you get a $5K raise and $6K the next and $6K the next and suddenly, just your 3 raises cover half your mortgage payments.  Meanwhile, your home goes from $240K to $276K to $317K to $365K and your balance is about $180K.  Presto – you have made a profit of 2 year's salary in three years under a 10% inflation economy. 

Inflation is not a bubble the way the housing bubble was.  I wrote article after article saying that commodity inflation WITHOUT wage inflation was a recipe for disaster but people called me a communist for worrying about the working class.  Well, now the working class is in revolt and they are getting their representatives to tax the rich – In the US, France and now in England, where the top tax rates are also set to rise.  The only thing that will ultimately appease the masses is to pay them more money, let them buy homes and become investors again themselves -THEN you will get popular backing to reduce capital gains and "death taxes."  For now, inflate away I say – it's the only way we'll ever pay of our now $13Tn National Debt.

The Hang Seng deflated last night by 2.3% as the Yuan has gained 33% against the Korean Won and 12% against the Singapore Dollar since last summer but has been dead flat to the dollar. The U.S. Treasury will announce this spring whether it will slap a "currency manipulator" tag on China, something that it hasn't done since 1994 and that is very unsettling to Hong Kong traders.  The Shanghai held flat and the Nikkei was closed for a holiday so hard to draw any conclusions from Asia today.

Europe is trading flat ahead of our open (8:30), still testing the same watch levels we had yesterday and EU leaders rejected calls for more market stimulus as their Central Banks are clearly mandated to combat inflation at all costs.  Germany is looking to nationalize banks "temporarily," British borrowing is through the roof and Industrial Production is at the lowest level since 1986. “The dreadful industrial-production figures for January confirm that the euro-zone recession is deepening rapidly,” said Martin van Vliet, senior economist at ING Bank in Amsterdam. “Further macroeconomic stimulus is urgently required.”

So happy Friday to ya!  Needless to say we will be getting neutral into the weekend.  Europe's pain is our gain as worried global investors continue to spread their risks despite concerns about our economy.  Sony/Ericsson in Europe is posting a Q4 loss on a very steep drop in consumer demand but this is old news and we have a great wall of earnings worry to climb next month if we are going to get these markets back over the hump. 

Keep an eye on GOOG $340s today at .30, they should hold .10 – .15 through lunch and it's a fun play if we luck out and get a rally but be aware that 9 out of 10 times, these expire worthless


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DIA   Do they trade after hours?  I’ve got 73 putters on my mattress that I’m watching and hoping they expire, but wonder if I need to worry about past the bell.

Phil – question for after the close. I’m sure you;ve seen optionpain.com.  Do you think this information is useful, and if so in what way? I happened to notice the SPY midpoint was 77 yesterday, 80, early today, and now 82, amidst this relatively down day. Any comments on that? No big rush. 

Miller; thanks, I think.  Please do check in whenever you like.
We’ll see how it (O) turns out, won’t we.  I don’t know how long you have been here on PSW, but I am hoping for the best, although I am more impressed with him as a politician than as a leader.  In my view, and I know many here disagree, the early signs are not encouraging.  The rhetoric does not measure up to the reality; I’ll leave the details to my little blog.
Highlander – LOL.  Thanks, don’t worry I won’t.  Good place for me to vent and inform to the extent anyone actually reads it.

Phil: what is better for now: for cover of DIA Jun 75 puts, sell march3/31 72 put or apr4/17 72 put ?

DB, looks like the stick save may have been quite short (3pm – 3:05); but let’s see what happens last 10-15 minutes today.

Phil:  You’ve mentioned selling puts as a smart way to open a position in a stock you want to own.  If the stock goes up the put is worth less so you make money.  If the stock goes down and you are required to purchase the stock the entry price is reduced by the proceeds from selling the put.  Plus, less capital is used up while holding the puts versus immediately going out and buying the stock.  It sounds like a great idea, but what are the potential pitfalls?  One is that if the stock goes up a lot, your gain is limited to the amount for which you sold the put.  Any other pitfalls to keep in mind?   Do you typically use an expiration that is one month out when you sell a put as in hope of purchasing the stock?  Thanks.

DB – looks like I spoke too soon, here comes Mr. Hockey Stick.  Looks like the energy names are leading the way back.
Pinning update:
AAPL; closing in on 100, but likely to stay a little bit above.
VLO, TSO … way off.
CHK  … 17.50
AMZN …. 70; hopefully a bit under.
C …. 2.50 looks right on.
GS …. looks sub 100 is a lock, can they get to 95 ?
GOOG … looking like 330, maybe a touch below.
SKF, looks like 125, but that can change in a flash.  I would say 130 or 120 are in play also.

Cap/Stick – Looks like a bent stick but they’re still at it – you’re right though its only the last 5/10 mins that they can hit the numbers they want without people fighting back.

To be clear: I’m not in the trade now, and I understand you don’t want to get assigned on the front month options you sold. I’m trying to understand the overall strategy. For instance, how much net premium are to trying to gain per month on your putters and callers? I can’t seem to find the Jan 11th "Update 2," which I’m guessing outlines the original strategy.

JohnC1/put selling   The risk is really that of owning the stock, but just reduced by the amount of premium received.   When C was trading at 15, if you sold the 12.50 puts and got a $1 it seemed like a no brainer.  Unfortunately, it turn out that well.   That’s why you should really want to take the stock.  If you change your mind you can either roll it or close it out before assignment, but don’t let it get too far ITM or you can get assigned early.
The other risk is one that I’ve fallen victim to.   There is not easier "free money" than selling puts in a bull market.  You keep collecting premium and the puts expiring worthless.   It really looks like you’re getting something for nothing.   The problem can be when you start losing sight of the risk and open too many positions and/or start increasing the positions sizes beyond the amount of stock you are willing to buy.   If you have too many positions open and the market turns downward you can really get killed and you’ll be subject to margin calls.  So stay small when you start and be sure you really are willing/able to buy the stock at the put price.

Another 10 minutes and I will be cashing out šŸ™

Eph – Expiration time is noon tomorrow. Fidelity always tells me that DIA and SPY trades until 16:15 ET. After market close a MM can assign contracts until tomorrow and they do it based on predicted Mon opening price. FWIW

PPT certainly working hard. Must be a very expensive day. Still FEDs can buy a few trillion bonds to cover it.

Thank you for your comment regarding selling puts.  It is really helpful.

DIA Mattress:   I just confirmed with TOS.  Options close at 4:00, but the DIAs trade for 15 minutes AH.   If you have a putters that are ATM (like my 73s) you risk assignment if you leave the open at the close.  If the DIAs drop AH and the options go ITM you’ll have no way to close the position.   Buy ’em back before the close.   While I was typing this my closing order for .05 was just exercises.  TOS allows you to make closing order for .05 for free just so you’ll avoid these types of risks.

Phil- if we finish spot on 10% levels, what does that mean to you going into Monday and rest of week?

Short puts that are ITM and that I’m planning to let get exercised:   DRYS @ 5.00 and SLG @ 12.50.   Anyone hate the idea?

SKF experiment died a miserable death. Gamblers always lose!

SRS getting jammed up to 70, the question is will they go past.  The calls are now cheap…

Had some decent gains earlier in the week, gave them all back today, bummer.   Have a good weekend everyone.

DIAs   The quarterlies are nice intermediate covers.   I’m 3/8 covered with the 72s that still have almost $2 in premium for 11 days.

Yep, that was the least fun oe week I’ve had in a while.  But then I wasn’t trading for two mostly up days so maybe I just missed out on the good stuff.  Except for yesterday.  Have a good one.

Yes, Phil, just sell more OTM CALL and PUTs when VIX is up.  Already out when VIX drops.
Alright folks – I’m out for a 3 weeks vacation to Australia which is warm and sunny right now, will check in once in a while.  Best of luck!

Question (for anyone)  >>   What option ticker do you use for that special "March 31st" option series on the DIA ?   Thanks    /SWB

Max Pain site …. looks cool; but not so accurate:  
SKF = 155,  AAPL = 95 for example.  
 I suppose it works best for less volatile stocks that trade in a relatively tight range.
Have a good weekend everyone.

 Eph, good comment about the position size of the puts.  I kind of got greedy and mildly burned recently last month and had to close out some putters early for a loss because I eventually realized how much stock I was committing myself to buying and I didn’t feel the stock was that much of a *sure thing* anymore based on how much I was committing.  
The margin stuff on TOS is a bit misleading as you don’t have to commit 100% of the stock purchase price.  So I think it just requires constant monitoring and discipline to look for yourself at # of putters you have at what strike and do the math yourself to understand what you’re really committing across your whole portfolio.
Back when I started doing the putter stuff  mid last year when I was over at Vanguard (had a brokerage account, and index funds with them, just approved for writing puts, but commissions are horrible so it forces you to trade in bigger lots), they only allow you to do cash secured puts.  So I think the fact they forced me to set aside cash (it would still earn sweep account interest) on each put write kept me in line easily, and nothing got out of hand and I made a bit of money.

 swbedell – thinkorswim has them nicely listed and obvious as quarterlys.  However, you can grab the list from here:
Notice it says these options expire Mar 30 2009.  Therefore they are the quarterlys.  Unfortunately it looks like they only show up as so probably because the other Mar’s expired.  Looking over at Jun’s which are the next month to have quarterlys, I don’t see the quarterly’s listed…
However google finance’s option link points to morningstar which kinda is annoying to look at but here’s the link and they do list the quarterlys, just look at days number to differentiate between normal and quarterlys for the same month.  http://quote.morningstar.com/Option/Options.aspx?sLevel=A&ticker=DIA

CHEN:   Thank you for all the good information.    My trading platform is Schwab StreetSmart Pro and they don’t have the DIA March 30/31 or DIA June 30’s listed on their option screens.   That is why I thought they might have a special symbol for the quarterlies as opposed to the monthly series.    I will need to contact them on Monday to find out how to access these.    Thanks again for your help and references    /SWB

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