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Thursday, March 30, 2023


Thursday – Are We Thawing Out or Melting Down?

Greece is resolved!

Well, sort of, maybe – who knows?  The EU made some nice noises and it does seem there is an agreement which I detailed in my previous post so let’s move on and see what that’s going to do for us today.  We’ve been playing for a resolution in Greece giving us a boost back to test 10,300 but yesterday’s market movement was, as they say at Wharton, LAME and we’re going to have a tough time punching through 10,058 and 10,165 on the way to 10,300 today (see yesterday’s Dow charts), even if the Dow were so inclined

10,300 is 2.6% higher than yesterday’s 10,038 close but a little far away considering commerce is still shut down in about 1/3 of the US today as we sit under a massive amount of snow.  This kind of weather is bad for most retail but good for HD and LOW, who sell salt and shovels and other fun snow stuff.  Business people are stranded all over the country, moms are suddenly found unexpectedly with kids at home and people can’t park anywhere – a big problem when you have this much snow as you run out of places to push it to. 

Another problem with snow is it’s an unavoidable cost, like disaster spending, that couldn’t be hitting cities at a worse time.  Washington DC had already blown through their $6.2M snow budget for the year before yesterday’s storm, which may double the costs, adding to the city’s debt woes.  230,000 Federal employees are off for the 4th day in a row today, costing the US government $100M a day in lost productivity.  Public transportation is down and over 6,000 flights were canceled with travelers being told "maybe Sunday" for flights they missed on Wednesday – Greece’s national strike is nothing compared to the economic impact of this storm!

Speaking of coming storms.  We’ve been leery of getting back into SRS but I’m back to liking them (and the short IYR plays) as a report by the Congressional Oversight Panel shows nearly 3,000 small banks may have to dramatically cut lending as losses on commercial real-estate loans, which could reach as high as $200B-300B. Banks "are about to get hit by a tidal wave of commercial-loan failures."  This should finally push an issue we’ve been discussing since last Fall onto the front pages, where we can make some money

We’ve learned to be very cautious with SRS but I do like the July $6/8 bull call spread at $1.25, selling one Jan $10 put for $3 for each 3 of the bull spreads so your net entry is .25 per $2 spread if SRS hits the July target and expires over $10 in Jan for a nice 700% profit with a break/even at about $7.50 in July (now $8.50) as that would return $4.50 against the Jan $10 puts and you can net out of the trade. 

A duller way to play is simply shorting IYR, now $42.48 or buying the June $40 puts for $2.40, which is nice as you can sell March $40 puts, now .90, while you wait.  I’m torn on this one because I am trying to stay bullish on the markets but the possible collapse of CRE is one of the reasons I was bearish as the market went higher at the end of last year.  Now, at least, we’ll get a chance to see how much of this is priced into our indexes but I do think it’s important to offset bearish bets like this with bullish bets on the financials, like our well-hedged XLF and UYG entries as no CRE collapse = stronger banks.

Speaking of strong banks – Our beloved Fed is now backstopping $25Tn in Credit Default Swaps with, of course, YOUR MONEY.  You were obligated this week as the Fed approved an application by the Depository Trust & Clearing Corporation to operate "the Trade Information Warehouse (Warehouse) for over the-counter (OTC) credit derivatives."  The new Fed-endorsed organization will settle CDS obligations in all currencies and process credit events. It will also include all OTC credit derivatives traded worldwide, and will be regulated by the Fed and the NY State Banking Department and will be overseen by other US and International regulators.

As Zero Hedge points out: "What all this implies is that basis spreads will likely compress very shortly, once counterparty risk becomes a thing of the past and all systemic risk in the biggest derivative market out there (ex IR swaps) is fully backstopped by the Federal Reserve. It will also guarantee the DTCC monopoly status when it comes to CDS trading as nobody will desire to transact and/or clear elsewhere. We shudder to think if the Fed grants DTCC with exclusive status for IR and FX swaps as well, and the associated $600 trillion notional outstanding."  Oh come on, what can go wrong?

By eliminating step 3 entirely, the Fed/DTCC entity becomes the Freddie Mac of the CDS world and hedge funds are free to run out and write all sorts of nonsense papers knowing they have a rich sucker who will buy it all – no questions asked (except by Congress about 12 months AFTER it all falls apart).  Yes, it’s your tax dollars at work or, rather, all the tax dollars you are likely to pay as a nation for the next decade now obligated to keep the CDS scam going rather than forcing it to scale back by simply NOT supporting it when it fails

Speaking of kicking an explosive can down the road – CitiMortgage (C) announced that they will let some delinquent borrowers remain in their homes without making mortgage payments for six months if they voluntarily transfer ownership to the bank.  "We are concerned that if there is a foreclosure glut at some point in the cycle it would have to have a negative impact on house prices, and Citi’s pilot program should help prevent a build-up in foreclosed homes," said Sanjiv Das, the chief executive of CitiMortgage.  

The CitiMortgage pilot program provides incentives for more borrowers to use a procedure known as a "deed in lieu of foreclosure," in which the borrower voluntarily transfers ownership of the home to the lender, which then cancels the mortgage debt. Aside from letting such people stay in the homes for six months, CitiMortgage says it will give them at least $1,000 to cover relocation costs, an incentive sometimes dubbed "cash for keys."

Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP, estimates 7.1 million of the 7.9 million households behind on their mortgage payments will lose their homes to foreclosure if nothing is done to improve current loan-modification programs. She believes banks should put much more emphasis on loan modifications that reduce the principal for people who are deeply under water.  315,716 brand new foreclosure notices were sent out in January, up 15% from last January, according to RealtyTrac.  That’s a rate of 1 in 34 homes over the year.  In Nevada, it was on in 95 homes, but that was for January ALONE – divide that by 12 and it’s one in 8 for the year. 

So how about shorting that Real Estate market?!?  OK then…   Oops, out of time.  Well the EU does NOT seem to have a definitive statement on Greece and may not until the weekend and that dropped us half a percent from what was looking like a nice open.  Greek mythology will still drive the markets until this matter is resolved.  Asia was up nicely this morning and Europe is mixed but also took a hit just now so we’ll have to wait and see – again – like we’ve been doing all week



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gucci & cwan,
Yup, cwan’s answer is correct.  The margin on the ultras increased by 2x or 3x in December 2009, resulting in a lower return for short strangles on the ultras than in the 1x indices, so we stopped playing them.  Those 3x ultras gets into trouble when the indices drops or gains 20%, which is 60% on the 3x, getting them to zero quickly and killing the short strangles.
Hey folks, I recently found out that TOS allows us to sell naked puts in IRA retirement accounts!  Not naked calls, just puts.  So if we see a good bottom, we can sell the puts on the ultras instead of on the regular indices, since the margin in IRAs is 100% anyway.

Hi, Cwan:
Just my gut feeling… I do not see any direct correlation between the problems in the Eurozone and our market valuations, certainly not long term. ( Dubai was just a short term glitch in the markets) My feeling is they, (Eurozone) a family of economic structures that have in common a common  currency they share, will as, in most families, solve their family problems. If they do not, then they ALL will suffer. In the short term, they, as an entity sharing the same currency, will look at this risk and will swallow the immediate negativity, and will feel they dodged a fatal shot to the heart. Overall the entire currency will have to absorb the loss, but this loss is better than a domino effect that could be catestrophic for them all. The wayward countries who have debt problems are the smaller of the consortium, and this disparity in their debt ratios are able to be absorbed into the family. Geez, Greece was only 450 Bil upside down. All that is needed, is to have France sell a bunch of expensive wines to the buyers of Mercedes Benz automobiles in wealthier countries,in order to capture the revenue to bring the disparity into balance.

Thanks, Gel1.

Hi, Peter,
TOS allows you to sell puts in IRA, but you have to put up the full value of the puts as margin.  That is, if you sell one contract of a put with strike $10, your buying power goes down $10 x 100 = $1000.  Imagine if you want to sell puts on GOOG!
I believe that is the case.  Correct me if I am wrong.

Hi, Peter, re IB: Months ago I was looking at various brokers.  I think IB has a web based platform with much reduced functionality.  You might want to give it a try.
I haven’t really tried IB yet.  Do they have PM?  What’s their minimum account balance for PM?

Cwan –
IB has PM – I think the minimum for PM is 100K –
The platform was designed for institutional trading – its trader workstation – it’s not bad to use – but – it’s really designed to be customized for institutional use –
i might move my retirement stuff to TOS for the tools that you get and I know everyone loves it –
but on a price alone basis IB cannot be beat – I did not negotiate any special deal and am paying $1 per contract –
For Emini options – I paid $3.62 for 2 contracts
5 TBT contracts – $3.57 (total or just 71 cents per contract)
DIA roll today on 5 contracts $7.14 – (ten contracts in total – buy five / sell five)
Unless you are trading huge volume – I really don’t think TOS can beat that

cwan & sam,
sam is correct on the 100k PM minimum for IB.  Note that their fine prints said they will automatically liquidate the positions if the balance gets below 100k.  This is rather dangerous.  TOS has a person looks at it to see whether the reason is due to a software error in calculating the balance before giving us 1 day to meet the PM margin deficiency.  With IB, imagine that we can find our short strangles got liquidated if we are unlucky to suffer a spike in the market.  I could be wrong in my interpretation, and will call them some time to get clarification.
As with the rates, TOS gives me a great deal, and IB doesn’t beat it by much.  With all the services and the nice trading platform, I have no complain, but I do need to put some eggs in other baskets.

Almost missed the naked put discussion.  I’m just looking at the maximum percent return.  For example, selling SPY Mar 108 put (ATM) nets us $3.07, which is about 2.8%, while selling TNA Mar 38 for $3.4 is 8.7%.  These are maximum gain if we are correct.   If we get it wrong, the loss is 3x as large in percentage term for the ultra as they move 3x as much.  If we sell 10% OTM, i.e. SPY Mar 97 put and TNA 27 put, we get 0.6% and 1.5% maximum profit respectively.  The loss is zero for approximately 10% move down in SPY.  1.5% for 6 weeks is not bad.
We can do iron condors to increase the profit percentage, but those are all or nothing play that we can loose it all if the market goes past the outter strikes.  With naked puts, we keep rolling until the market comes back up.

Mocha – I missed 21.50 buys on HK this morning TWICE !   Arrggggh.
The 1st time I was screwed by an algo or MM that front ran my order that I placed at the ask.  The instant I placed it they moved the stock up a nickel.

Mocha – I missed 21.50 buys on HK this morning TWICE !   Arrggggh.
The 1st time I was screwed by an algo or MM that front ran my order that I placed at the ask.  The instant I placed it they moved the stock up a nickel.

Fidelity – 1 of my accounts is there.  The other day a rep told me they have a downloadable options platform that would be useful for an active option trader like me.  I have not tried it; but perhaps their platform has improved since some of you left.  I don’t know.

Peter –  naked puts in IRA’s must be cash covered.  You need to have enough cash to cover an assignment.
E-Trade also allows naked cash covered put selling.  I just moved some IRA money there.  Tired of earning $1 per month on a 0.08% money market fund.

IB – I never used them.  But over the past couple of years we have had several folks here tell horror stories about IB blowing out their accounts on no notice whatsover.
There is no way in hell I would recommend IB to anyone on that issue alone.

Peter – I have negotiated pretty decent deals at Schwab,Etrade and Fidelity.  The bigger and more active you are, the more they will play ball.  With all the firms now in a price war; I am planning to go back to the well and renegotiate even lower.

Hi, Peter, Samz & Cap,
I have accounts at TOS and I love them.  But, like Peter, I am also looking for a 2nd broker.  Not very many brokers have PM.  I also asked TradeStation.  They don’t have PM either.  As far as IB, I also heard some not so good stories.  But we may not have a whole lot of choices.
If IB’s platform is not easy to use, I hope that their web-based platform is good enough to place trades.  All we care about are GTC, spreads and maybe several other trades.  We can use TOS to get qoutes, do analysis, etc.

Hi, Peter,
Your idea of selling SPY puts in IRA is interesting!
I tried SPY iron condor in my IRA once.  The strikes had to be fairly close to market in order to get decent premiums.  Scared the hell out of me!  And as you said, no chance to roll.
I’ll give your SPY puts idea a try!

Hi, Cap,
What kind of deal do you get at Schwab and how many contracts do you trade there in order to get that kind of deal?

Jobs-overseas- I have often heard the lament over evil corporations having "shipped jobs overseas" which I find very amusing. It reminds me of the occasioinal confrontations with union thugs on job sights where their complaint was "Hey, that is OUR work". My response was always, "Well, last I looked, my name is on the contract for this job. I bid it and won it." The response was blank stares initially as I challenged  their sense of entitlement so they resorted to threats and intimidation. Having been born and raised on the south side of Chicago I am well schooled in such measures so let’s just say that those tactics failed.
The point is the sense of entitlement. Neither the union nor the contractor for whom they worked "shipped" the job to me. I came and took it!. While this may be a micro-anecdote compared to the macro-issue the logic holds. To paraphrase George Washington Plunkett, "they seen the opportunities and tookem".
By what standard are we entitled to those so-called well paid manufacturing jobs? By what standard do we deny the rights of others to improve their lot in life?
In my business career, I have lost customers to competitors for a host of reasons. In all cases, it comes down to the other guy being able to better meet the customer’s needs. No different on a global scale.
Should government step in to protect the union’s entitlement vs. me? Should government step in to protect American’s entitlement vs. the Chinese or Malaysions or Vietnamese?  By your logic, a tax on me would be justified to protect the union’s workers interests while denying my rights. By your logic , a tax on GE is justified while denying the rights of some Indonesian peasant?
Who is in charge of picking the winners and losers?
In my view, the government policies which are out of whack are those which promote entitlement which in turn promotes dependence. Rather than wallowing in victimhood and soothing our pain by longing  for the good old days we would be far better served by a healthy dose of personal responsibility and more vigourous pursuit of self reliance.

at present, I am paying $8.95 + 0.25 per contract; not bad; not great.  Now w/ their lowered rates, the 8.95 seems too high; I will try to get that lowered.  I think their standard per contract rate is 0.75 ?   Makes a difference if you trade a lot of contracts.  I trade a lot overall, but usually 1-10 at a time; although sometimes 40 or 50 at a time if w/ the indexes.

Naysay/Slash & Burn- Pretty good rant this morning. Sounds like you were channeling Ayn Rand. Too bad it is completely off point. Seems like, by your own admission, you left the slashing and burning of your sold firm to others? Still looking for the answer to who picks the winners and losers? You?

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