Reasonably Thinking

With option expiration scheduled to take place on Friday, I must be prepared.  Two of my positions that are set to expire are my Freddie Mac (FMCC) puts and housing (ITB) puts, both of which are in the money.  My intent is to exit the Freddie Mac position, since the stock is trading over the counter, and to roll the housing position.  To roll the housing position, I simply need to purchase put options for some time in the future and sell/convert my current puts (that expire Friday).  To initiate this strategy, I purchased 7 ITB put options today, with an expiration of January 2011, for $5.90 each.  I will obviously exit my 6 July ITB puts before the week’s end.

Independent from the above, I decided to increase my short exposure to financial companies.  In the long term, I foresee a subdued economy where bank loan losses increase.  As such, I shorted 25 shares of the financial exchange traded fund UYG at $57.60.  In addition, I believe provisions for loan losses (funds set aside for loan losses) are currently too small; an increase in quarterly provisions could stymie bank profits.  Furthermore, it is possible that European credit concerns throughout the second quarter reduced lending, which could hinder quarterly revenue.  Therefore, I purchased an August put option, with a strike of $32, on the financial bull exchange traded fund FAS for $8.90.

So, the UYG is the bearish long term play; FAS is the bearish short term play.  JPM reports its quarterly earnings on Thursday; BAC and C report their quarterly earnings on Friday.

You can read more about my perspective on housing, banks, and the economy by reading my latest opinion piece:  Housing, Economy, Banks–A Three Legged Stool With Three Broken Legs.