Cara's Commentary & Community Chat, Thurs., Apr. 23, 2009

Mr. Cara, permit me to express my sincerest condolences on your loss and those of the family and friends of Mr. Jones.

Bill... very sorry to hear this.

I can relate... this brings a lot of memories of business in xUSSR in 1990s. My sincere condolences

Les- Sorry man. I swear HB&B traders read our posts and are intent on squeezing us ;)

...

OK, what potential dangers do I face 2nd/Dave?

Those June 20 Calls I sold could potentially be offloaded to me today if WFC makes it to $20, no?

That I cannot afford.

Yesterday follows similar pattern 2nd. Squeezing the shorts or offloading for profits at the close?

Contained to WFC. Someone's making their play.

Les- If you no longer like the paired trade, close them out now. It looks like you can unwind the trade at a 0.10-0.15 net loss. I'm not so sure you have much to worry about. But I haven't taken the time to fully go through Dave's explanation.

That's rough news. I've been dealing with a family tragedy for the past month and I know how hard it is. Best wishes.

First of all, you are short a call, so they can't give you shares, they can only take them away. And since you don't have any to call away, presumably your broker would turn that into a cash transaction.

But the real thing is, nobody is going to do anything right now. Your call is out of the money, AND it costs $2 each. So to execute that call, they'd have to pay $20 + $2 for the premium for something they could get on the open market for $19.50. So that part is not gonna happen, you can relax.

If you only got 2 or 3 of these use this as training. Watch how the prices move as the underlying moves. See how the long call rises in value while the short call goes more negative, and vice versa. See how they behave.

But whatever you do, do not sell the long call and keep the short call, because then you are unhedged and that's quite dangerous.

First, you can relax, you will not get exercised. And if you do, you will make big money. :)
That's because you'd sell something for $22.75 that you can buy for $19.61.
And that's why it won't happen.

Let me walk through it.

When you are short a call, it means that, theoretically, someone could use that call to buy stock from you at the strike price. In this case, $20.

To acquire this right, the "pro" would pay the privilege of $2.75 for each share (the june calls are trading at $2.75 each right now). And then, to exercise, he would have to buy WFC from you at $20 per share. So his total cost to get 1 share of WFC from you would be $20 + $2.75 = $22.75. At the same time, he could buy this on the open market for $19.61 right now. So his choice is:
* buy an option, exercise it, and get your stock for $22.75
* buy the stock on the open market for $19.61.

Clearly his choice would not be to exercise. He loses more than $3 on the trade. There's no way he'd do this.

The only time an exercise would ever happen is if the option were very cheap, and very close to the money. Say the option were trading for $0.05, and WFC were trading near $20 and there was a momentary arbitrage opportunity. But with the option at $2.75, that is absolutely not going to happen.

Does this make more sense?

It is kinda unfortunate we pick a stock that's up 3x what the other financials are doing today to practice this on. But what can you do?

Like I said before, watch how the different calls gain and lose money as WFC changes in price. Then you will be able to see what it means to be hedged. One goes up when the other goes down. But the way this is profitable is, if WFC stays under 20 - and preferably drops to somewhere near zero - you will end up making more on the call you wrote, than you will lose on the call you bought.

http://www.nyse.com/pdfs/PT042309.pdf

I am not a expert in this arena but my 1st glance take is they must have access to the printing presses and they are making up majority of the volume with their trading programs vs their peers.

Any comments or insights from the community?

2nd
i am in at 13.61

UNG has me intrigued. It looks a whole like USO did a few months back. What do you guys see as the indicator that it has stopped it's trend-of-woe at this moment in time?

BSi, whats the reasoning? In jan 09 when Ung rsi7 crossed the 30 line it continued to drop from $22 to below 19. What do you see differently if you want to tell?
peace

So you might notice that his call isn't naked, it's protected by the call he bought with a strike price a few points higher. So if WFC happens to have a moonshot, the call he bought with a strike of 22.50 will protect the one he wrote with strike 22.

Bill, very sorry to hear about your friend. It never seems to end - people being pursued and eliminated without a second thought.

As to the BofA and the Paulson directive, it comes as no surprise. The corruption in the US government along with the linkages to the rich & powerful is nothing new - but today it is especially frightening.

I await the American equivalent of Robert Saviano's 'Gomorra'.

bsi87,

I bought a starter position only and will watch for better accumulation points...thanks bsi87. I am a big time believer in RSI signals as well as volume capitulation...lower risk for sure and we are all about risk managment. If I may ask were there any other critaria like demand/supply or othes you used for guidance? Thanks...your like a machine and you keep it simple.

I'm thinking that tomorrow, the start of the stress test leaks will be an excuse for HB&B to induce some serious volatility in the financial stocks, perhaps even for a week or two. I'm thinking maybe now would be a reasonable time to close out my financial shorts... :) Even tho I'm down, perhaps more volatility is not what my heart needs right now.

I have zero feeling today. What does everyone think about direction of the market today. Higher close lower close or same muddling along.

...

we'll see 2nd.....bumping 850 on S&P....seems to resist some times. SRS has been following market.

Alright, I'm back. I unfortunately must earn my way in this house and that means making dinner every evening.

So I've got this option thing back to front then.

As I discovered buying options on opex in April, having BOUGHT C $4 puts (already bought and sold the $4 call), Si02 was saying that if I held until closing I'd be forced to buy the underlying. I thought because I had paid for the insurance, that I had the choice and not the obligation.

So in this case, being short a call (I understand now, shorting a call is like shorting an equity - sold without owning it) means that the call can be taken away from me for the strike price, but at the condition that the premium is paid to me.

Short/sell the option, you pay the premium + strike price to take it away if I AM WRONG.

Enough of this ignorance. I will read up Bill's suggestion in his book for options trading this weekend.

Admittedly I've never encountered the literature on naked calls. The Motley Fool doesn't touch it. This must change.

http://tinyurl.com/cepngp

Unreal.

I'm with the mkt is due for a pullback herd. Oil stocks inparticular are higher than anytime during the period 1/6/2006-present http://tinyurl.com/d3dz6u

The Mkt continues to power higher. My guess: I expect at eod the mkt will be in the positive and will end tomorrow down. Durable goods and new home sales report tomorrow, why would they be good or even better than expected? This morning 1st time jobless claims were 640k. From Econoday "...continuing claims show increasing trouble, up 93,000 to a record 6.137 million (data for the April 11 week). Continuing claims have set 12 straight records, reflecting the mounting number of unemployed." http://tinyurl.com/chc6em

...

Bill, I'm very sorry to hear about the tragic loss of your friend. Things like that have ripple effects and make the world a sadder place for all.

...

...

Then it breaks one way or the other...

Les- I think the paired trade was a great idea. I can only imagine the straits I'd be in myself had I left my morning WFC short on the table and left for a few hours.

Pz- I think you have a good handle on the 2x/3x groove. Enter on sharp moves, and exit quickly. Take no one home.

closed out my May $35 calls at $3.00 that i bought at 3.02 average. Bought FAZ at $9.60.

Thats what i see.

I also am very sorry to hear, another obscenity. My condolences.

...

http://www.nytimes.com/2009/04/22/business/economy...

Les- Good chance we gap down tomorrow. Traps today's buyers.

...

overnight hold.

real fun happens in last 15 minutes

"As we have progressed from September 2008 to March 2009, we have seen business and market conditions worsen each succeeding month," Nucor said in a statement.

http://tinyurl.com/dkvytl

Wow... 2nd, you're in/out of the ultra's all day, probably couple dozen times!

I'm assuming that you don't have a day job! :)

http://tinyurl.com/c8z454

"I'm assuming that you don't have a day job! :)"

I DO have a day job. But I'm not there today ;)

I don't know what the Triple RSI readings were in Jan so I can't speak to that.

The RSI screener will likely give an accumulate signal at the EOD today and with a break above RSI 30 for the 7 day, the screener will give a buy. Currently it's about 28.72. MACD is diverging.

Just looks/feels like a low risk trade. Will put a buck stop below the close.

I'm guessing this is short covering prior to the stress test news tomorrow. Pity I didn't shift long.

I am US legal resident and wanted to trade options through my margin account at IB but could not gain access.

I inquired why and via email they wrote to me that "US legal residents are generally excluded from trading securities options outside the USA due to SEC regulations."

Thank goodness for the SEC!

Any of you face this problem? Are there practical ways around this? Would opening a Canadian brokerage account be a way?

"…I thought because I had paid for the insurance, that I had the choice and not the obligation…."

Les, couple of other things to consider.

Yes if you buy the option (insurance like you say), you have the decision whether to exercise it or not, which you could do before or at expiration.

However please be aware there is a procedure known as "exercise by exception", ie the Options Clearing Corp will automatically exercise any option which is $0.01 (yes one cent) in the money, unless they receive instructions from your broker not to exercise. Check with your broker on the rules which apply to your account.

Scenario; lots of people do this, you buy 10 Google calls with a $380 strike thinking it is going up and you will just sell the calls prior to expiry for the profit. But nothing happens, stock hangs around $380 into expiration and the calls are selling for say less than you could clear after the commissions, so you just let those 10 contracts die / expire.

The stock closes on expiry at $380.02, you are in the money by 0.02 cents, ie $20 total for the 10 contracts (1000 shares), after commissions its not worth it or it’s a loss, you were right to not exercise, would have been nice if you could have sold them days or weeks earlier to cover your costs, but didn't happen.

Now the next day, the OCC exercises by exception and the other guy delivers 1000 shares of Google into your account and they are looking for the $380,000.00 you agreed to pay for it. No money and things get messy, stock is sold lower and in the end you loose more.

Note the same thing can happen if you buy puts (naked, non-protective, you don't own the stock), just reversed, the stock will arrive and the other guy will expect payment.

Moral of the story is, if you own options and don't intend to exercise them, sell them before expiry. If you can't sell them call your broker and give them instructions not to exercise.

OCC memo from last Nov 2008 on how expiry prices are fixed and threshold values for exercise by exception.
http://www.optionsclearing.com/market/infomemos/20...

Not sure I've explained this very well, I'm sure Davefairtex is more up on this stuff, just something else to think about. I haven't been in this position personally so just guessing on how it would all play out.

Quasi

Now I'm really interested. But I have to pass.

bought 500 near close @8.97 & 500@ 8.91.

Vinod- SRS @ 26.50 bid in after hours. If that holds, may want to dump it.

9.30, 500 shares riding till tomorrow....not by choice, got tied up with VIP at work.....hope it doesnt back fire.

I would have taken SRS overnight at that level Vinod....breaking the law, breaking the law :' )
good luck

BSI, Craig

Thanks for the input.

WE ARE FRIENDS OF HYWEL FROM WALES. WE MET SO MANY OF HIS FRIENDS WHEN WE VISITED HIM IN THE BAHAMAS AND IT WAS NICE TO KNOW EVERYONE LOVED HIM AS MUCH AS WE DID. HE WAS A LOVELY GENEROUS MAN AND WE WILL MISS HIM GREATLY. OUR THOUGHTS ARE WITH ALL HIS FAMILY AND FRIENDS IN THE BAHAMAS

closed my position after hours at 8.95 that i bought at 9.60. bad call...

I don't like it when we are all thinking the same thing. They may take us out to the wood shed tomorrow!

I think quite a few here are all cash (or almost all) like me. But you're right, it does seem that a lot of the active trades being made (or at least posted here - thanks to all who take the time to post!) are shorts.

My only trade holding is May 9 calls on AUY. Unfortunately I think the Pakistan issue may make those calls even more profitable very soon.

Will be near SPX 860 by open and will push higher to last Fridays highs. Shorts have nothing to go on last few days and are sidelined. They failed miserably to play out Mondays sell off since.

Thinkning AMZN will lead/ squeeze tomorrow.

2nd
Later on I got cold feet and got out FAZ at 8.95 and SRS at 26.40
Kept oex put. Look like they going to take market higher in short term. But big fall is also coming
From Washington Post -and Barrons
Wells Fargo yesterday showed the potentially dramatic impact of the recent loosening of accounting rules as it reported a first-quarter profit of $3.05 billion.

The San Francisco company said the accounting change, which has generated controversy, allowed it to increase capital reserves by more than $4 billion. The increase could make a critical difference in the federal government's evaluation of the company's ability to withstand a deepening recession, accounting experts said.

"This makes them look a lot healthier in the eyes of the government and presumably other observers as well," said Robert Willens, who advises financial companies on tax and accounting issues. "And you would think therefore that they will have passed the stress test with flying colors."

If this is the way goverment is going to play, how do we play market?
and banks have led the stock market's advance since early March, you've got to wonder about their leadership abilities from here.

Bill, I am so sorry to learn about your dear friend, Hywel. I, too, pray for Hywel, his family and those friends who love and care for him. When I met Hywel at our Bahama conference I was touched by his kindness and goodwill.

Bruno

Yes Ron, and this is from zh: "Seems like Ken Lewis has changed his story. Previously Mr. Lewis has stated unambiguously that Bank of America was not aware of the losses at Merrill Lynch until after the Dec. 5 shareholder vote. Now he states differently. I think this will certainly strengthen our lawsuit."

Not a good day to be Bernanke, Lewis or a Pontiac Aztek [or a PT Cruiser]. Of course, the market seems to have effectively digested the upcoming resignation of the Federal Chairman ..."

Bill, my condolences.
It's hard enough when we lose people close to us in natures way, but to lose someone in such an inexplicable manner is truly horrible. Please take care of yourself.

Listing of equities which might interest:

FD: No positions, PDYODD

I apologize and meant no disrespect. I did not recognize this as an exclusive thread. Condolences on a sad and senseless tragedy.

I'm still holding. Presently FAZ is 9.03 +0.12 and Asia mkts are down (Nekkei -53.99, Straits Times -11.18, Hang Seng appears closed

Bill, really feel sorry & condolences for a senseless tragedy.

I'd also like to express my condolences. Boggles the mind. Too much senseless violence in this world...

Reporting back...My oil guy is still bullish crude, but is now neutral on NG. Any hints of reserve capacity draw downs, prices could spike. Same as before; drilling/production is ratcheted down so tight it will take time to ramp up. He also noted that this would be a short term occurrence and prices should stabilize given current economic output at 4-4.50.

Anyone know a time frame for tomorrows "backroom deal"?

Mark,
I was thinking about buying some cheap oil/oil related stocks (less than $10 ones, managed well) and park it for 4 or 5 years. Once the economic recovery starts, oil would be the first to go up & stabilize around $80. Same goes for dryshippers/oil shippers as well. Any short lists?

Anyone who had any doubts about whether Pakistan was a reliable ally in the war against terrorism is now assured. They are not. The entire country is now in danger of being taken over by a minority of Islamic crazies.. We are not dealing with a bunch of politically savvy but ruthless people, here, we are dealing with zealots who believe Allah is on their side. There is nothing worse than a zealot, and these are not people one can negotiate with, as the Pakistani government now knows well. Nothing but the force of arms - massive arms - will bring these insane Taliban to heel. And, time is running out. Israel's existential danger is not in Iran; it's in Pakistan.
A PBS Frontline video report, Pakistan: Children of the Taliban is required viewing.
http://tinyurl.com/dz9egf

Haven't read through all of it, just skimmed but this seemed very interesting from cfo.com:
http://tinyurl.com/dzbgvq

no one mentioned IBKR a Cara 100.

Got smoked after missing on earnings. They are still making a respectable profit and will likely continue to do so, but if you're long the stock, you're not a happy camper.

Tough being a market maker these days, unless you're ripping off bondholders ala GS.

So if I look at the natural gas front month futures weekly chart ($NATGAS), I notice there's a MACD crossover last week. And a bullish divergence in the RSI as well. This indicator has done a pretty good job of predicting future moves in natgas, as well as oil. Oil, when it had its crossover in Feb, promptly went up $10 in March & April.

Certainly when I look at the $NATGAS daily I see doom and gloom, but the weekly indicators show a flattening of the trend that my eye does not see. Looking at the monthly, I notice natgas prices are down to 2002 levels. Now that's deflation!

You could always write some short puts on UNG if you are thinking the price is getting close to a low and a turnaround is in the offing. We had a whole discussion about USO and its contango issues - contango looks to be about 3% right now on the NG contract.

I see the July 13 UNG puts are $1.05 right now. That gets you into UNG at a basis of $11.95 if it goes below 13 by July. And if there's a rebound, you can always go long at that point, and you collect your money on the puts. Not a recommendation. :)

Hammering HanK's inside deal:

Lewis testified that he asked Bernanke to “put something in writing” regarding the U.S. government’s plan to support Bank of America’s acquisition in view of Merrill’s mounting losses.

"After Bernanke said he would consider the idea, Paulson called Lewis and said, according to Lewis, “First it would be so watered down, it wouldn’t be as strong as what we were going to say to you verbally, and secondly, this would be a disclosable event and we do not want a disclosable event.”

The payoff: http://tinyurl.com/The-PayOFF
-- The U.S. government agreed to invest $20 billion more in Bank of America Corp. and guarantee $118 billion of its assets to help the lender absorb Merrill Lynch & Co...............

The government insisted the Merrill deal proceed because its collapse would renew turmoil in the financial system, according to the people, who declined to be identified because talks were private.

Bank of America will absorb the first $10 billion of losses in the pool of assets, of which the “large majority” were assumed with the Merrill purchase, the statement said. The company will absorb 10 percent of any additional losses, with the government on the hook for the remainder.

The Fed will backstop assets with a loan, after the government’s first $10 billion in losses, shared by the Treasury and the FDIC.

Dave, boughtmypoints and Bob 47,

edit: will look to exit this trade in the next week. Reading Bill's book, I'm breaking all the rules.

Let's see what happens today and monday.

http://tinyurl.com/cqy4bt

"detachment from reality" is his most repeated phrase :)

Les- To be honest, I see nothing in yesterday's action that tells me financials are going higher. XLF went up on very low volume. Until price action disproves the theory, the smarter move appears to be selling the rallies.

agreed. looking for confirmation at close today

Let's see how speculative bank share holders are feeling...

We have a twentyfourth now...thanks bill or whoever is doing the morning responsibility as I am thinking you have much on your plate in addition to this thread transfer...thanks so much!

re: Wed XLF candlestick was a gravestone doji. Yesterday was an inside day.

re: UNG. I can't discern any candlestick pattern. Triple RSI accumulation signal. RSI 7 day is 27.80. Break/close above 30, buy signal. MACD divergence.

spot gold n silver prices have pulled back and WTI is to high IMHO, i may short it.