With the market increase over the past week and a half, I decided to add a negative position. I shorted 50 shares of SSO at $37.15.
A continuing theme I have opined about since October, is that the economy is on shaky ground. Further, nothing in the private sector has convincingly driven growth—a theme highlighted by John Hussman yesterday in his Weekly Comment. At this stage of the game, I refuse to believe that any published GDP is a sign of relief unless it is concurrently free from federal deficit spending. In my eyes, taking on debt to increase assets fails to address the negative equity problem.
Independent from the economy, I still believe the market is overvalued, and this trade is a direct play on that theory.
As for executing the trade, and given the nature of how ultra leveraged ETFs work, I would rather short the ultra long (SSO) than long the ultra short (SDS). Yes, there is always a risk of a broker forcing me to cover in a squeeze, but the long positions are also susceptible to sudden price drops.
To hit the rewind button, I originally bought the June $44 put for $8 on 2/2/10 and sold it on 5/25/10 for $10.20, netting me a gain of $420.96. Today it is only worth $6.15. Clearly this is an example of buying low, selling high, and essentially buying low again.
July 13, 2010
Initiated financial short exposure; roll options 20100713
Posted by ReasonablyThinking under All Commentary, FAS, FRE, FMCC, ITB, Stock purchases, bought to cover, Stock sales, short sales, Trade History, Trade highlights | Tags: ITB, JPM, BAC, FMCC, UYG, FAS, C |[2] Comments
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.