Sunday, May 16, 2010
Scott: Q: This alt could come into play with options expiration. I guess we'll have to see. What if GS and JPM have a shitload of calls? They have to push it up to get out right? On Fri, May 14, 2010 at 8:20 PM,
I've shared Wave 2 of 3 ALT
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I hope wave 2 isn't an ABC but if it was to be, it WOULD make new highs with the A=C calc.
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Wave 2 of 3 ALT
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The most risky options bet is "Long Calls". The more common practice (the one explained by your Morgan Stanley patient) is selling calls to take in the premium. A Brokerage doesn't need to post stock as collateral only money. (I just got an email from Scottrade explaining how to sell a put instead of placing a limit order for a stock I wanted to buy- using the cash earmarked for purchase as the collateral).
A: No I don't think they own calls, I think they are "Short Calls" waiting for the premiums to whither out and die. Taken one step further, they are "Short Puts" also, maybe even more so, since VIX exploded the premiums and we were at lower levels, meaning they take in more money from the sale of puts.
Both "sides" (puts & calls) are sold, and as long as their stocks and indexes maneuver into middle ground on expiration day, none of these needs to be repurchased because they will expire "Out of the Money" = worthless. What I think has happened in the past is stocks have moved up above the strike prices, and the calls have had to be bought back, but that can be done with the simultaneous sale of the next month out call. In a rising market and DECLINING vix this can be done easily.
In a DECLINING market where put premiums are increasing, this is quite difficult. The next month out premiums do not rise as quickly as the current months', and "rolling" is still gonna be costly. And if the put is deep in the money, there is a higher collateral required. If the next month's put is out of the money (to avoid higher collateral) then its likely the premium sold will not cover the price of the repurchased option. These guys are in heavy, and could amount to billions in losses.
To Your Point: In either situation, GS & JPM all want the market to move up, or at least not down. But its more than profits missed, its losses piling on EXPONENTIALLY the lower the market goes. They've been able to move things their way in Wave 2 and in low volume trading, but can they push a Wave 3 market the way they want? It would involve buying stocks when they are going down = more losses.
This Dynamic might explain why JPM is so very weak, and the only major bank to make a lower low than last Thursday. Plus, I read on a Marketwatch commentary, they are naked short silver (whatever that means, its always naked in commodities) but keep in mind they are custodian for the etf SLV, maybe that has something to do with offsetting a long etf position.
Good thinking though, these cats are up to something that we know little about.
In a rising market, the puts don't need repurchase- they wither down to zero value as planned.
In a rising market, the other side of the call sales, the "Long Call" guy can exercise his right to "Call" the underlying security at any time before expiration, that's why they must move prior to expiration. I thought I saw unusual stock activity that was options related a few times with less than 2 weeks until expiration. This would explain it. A pre-emptive roll. They don't want to be called on stock they don't own.
In a declining market, the call side would expire worthless, no attention required, unless they felt that a snap-back was coming. That would be a mistake, because a rising vix inflates call premiums also, even in a declining market, for current month options mainly.
The day after the crash 1987 OEX CALLS were incredibly priced (this was the first time that volatility that large had been witnessed) but they were well out of the money.
"PREMIUM" is the deadly concept here. If you're "Long Premium" (Santelli has used this phrase) you're loving it.
This is gonna crush those guys on Options Action, the ones who double sell a put ..... Mike Khouw from Cantor, & Scott & Dan. Stacey Gilbert is the smart one, everything she has ever said has no naked risk on the put side.
Prechter said that when the banks decided to step up proprietary trading, they were going to be making big mistakes. Well, CDO's certainly counted. Now let's see what's next. Should be great for FAZ.
Hey, so its not too far-fetched to say these selloffs we used to see right after expirations LINK Were purposely manipulated for the sole purpose of pumping up the vix, and moving the strike prices lower on the new month's target options sales. It would also easily explain why the market always retraced over 100% of the decline, because they weren't natural sellers who would come back for more- they were done, they did what they had to. Wow. Its always the case, just when you figure something out, they change the rules. Now is the time, because MERRILL and MORGAN and CITI figured out how to do it, too.
How about that Wadell story and the 75,000 contract e-mini sale last Thursday? http://www.cnbc.com/id/37152223
Do you know how much money that is? Its HUGE, incredible if he made money repurchasing them on the swing back up.
But to most people, its a mystery. They will accept this mystery as an explanation to the 5/6 mystery. Nutty.
I left out something, The Other Side of the Put Mountain:
THE OTHER SIDE OF THE PUT TRADE:
If they sold puts like I think they did, they are unhedged hoping that a rising market will close out their trades at zero upon expiration. The only way to be protected is by owning another put. PROTECTION, as harped continuously by Pete Najarian (the Option Monster Mascot from Fast Money), "Buy Puts".
Here's the scenario I left out: All these naked puts sold have "buyers", hence the other side to which I refer. In a market decline, these puts go "In -The- Money" meaning they have some intrinsic value, meaning they MAY get exercised by the people who bought them. Let me use an example to explain. American Express AXP high of $49 currently $40.19 Let's say when the stock was $46 the traders sold the May 45 Puts naked for $2.00 (and did not buy any May 40's for $0.75). On the other side is Karen Finerman who owns AXP and buys protection, so she's the other side of the trade, she BUYS the May 45 put and spends the $2.00
NOW: AXP is at $40 and the put is in the money $5.00 Karen still has $45 in total value when she adds stock + put. Karen now has 2 choices- she can sell the put for a profit, and keep the stock, or she can EXERCISE the PUT: The stock plus the put get "put" to the seller in exchange for $45 (that's if she wants to dispose of the stock, which she might if she thinks the market will continue lower). So she's in good shape, she capped her losses at $45/share.
Now back to GS & JP- At first, they have instead of a $2 gain, a -$3.00 loss on the put they sold. But before they can buy it back, they get put Karen's stock. So now they have to cough up $45.00 in capital. And they now own the stock (which is still going down). They never did buy that $40 strike put in the beginning, so they are screwed 3 ways- its consuming capital BIG time, the losses continue, and if they sell the stock into the decline it opposes their strategy of pushing the market up into expiration. (they lost the use of $45 in firepower for a $2 trade- horrible math) (multiply this 1000x or however much it takes to make $100 million in one day). This is a massive operation.
As a result, that collateral gets called and now exists in the form of (more) shares.
The End, possibly for real for these trading desks (the only thriving sector within these large banks), as there will be no "TARP, Season 2" episodes. And Timmy gets fired, as studio heads often do.
In Conclusion, there is so much havoc that could occur if the Marketplex were to take a big dump before options expiration next Friday. The trading desks at the big broker/banks would be TOAST. Maybe that's why JPM, GS, MS, BAC are all down from their highs much more than the BKX Regional Bank Stocks (JPM made a post 5/6 lower low Friday).
This would be a field day for FAZ and FAZ call option holders. As FAZ proceeds to increase in PerCentage terms, the Points Terms increase each day. This is completely opposite to what the Dow has done from March 2009 until now- big moves occurred early on resulting in high-percentages. As the DOW moved up 70% those high-percentage moves got muted, volatility decreased. Except for 5/6 which was right in the ballpark, percentage- wise.
So look at you, man, you have it made. You're sitting in a front row seat looking forward into what could easily be what Prechter called "The greatest short-selling opportunity of a lifetime" (4/16/09 1004EWT pg10).
Wave 1 down didn't have FAZ (born 11/2008)
Wave 1 down didn't have options on FAZ.
Wave 1 down didn't have options on FAZ in penny increments between bids/asks.
What a huge advance in technology we have today- computers with instant quotes, not to mention the technology it took to invent a "stock" that goes up when everything else goes down. At 3x inverse gearing, its literally crazy to even imagine something like this, never mind getting it approved by the SEC and listing it on an exchange. It could only happen in a country where 299 million people don't have the foggiest notion of what goes on in the world of finance. Thank you, America!
IF we get a dump next week, make no under- estimation about it, it will lead to something HUGE, despite the efforts of GS et al to push it higher. The more they push, the worse it gets ultimately because they will use up the capital they will need when they get "PUT". But that's a problem for next Saturday. (Timmy loves to work weekends, doesn't he?)
Have a great weekend!