XLF has moved significantly. It is time in my opinion to unwind the trade. Buy back the 21 put we sold and hang onto the 20.
Now about talking heads. I was not amused but rather disturbed watching a talking head show last night. Either these pundits are very ignorant, or they want you as an investor ignorant. Both are terrible.
The question was asked why if there are 10's of millions of homes and only 1 maybe 2 million are in foreclosure why is this causing such a ruckus? The answer the pundit gave was exasperating. So much so that it was bulljive!
Let me explain since many of you will need to understand this. It is called leverage. Just as you an options trader need to understand leverage.
99.9% (my guess here not facts to back it up) of options traders figure they have a crystal ball or a chart or something that tells them where things will be in the future. So they speculate on a direction and buy a put or call and hope for the best.
Some are good at tight stop losses and so can have several wrong guesses and still make money.
Here is how it goes, the stock market always goes up (remember that mantra?) so we take Citigroup, it has been hit lately and rightly so. Now on average the market moves up 8%. So "C" being of the average kind will move up 8%. I use my math to calculate that "C" at 20 and add 8% puts it at 21.60 by the end of the year. So I put 10,000 dollars into a call position at the strike of 20. Should the stock move to 21 (and it will because my calculations are sound) then my 10,000 investment should be worth 15,000 (because once again my options pricer says so and it is based on math)
If the stock does not move (which it wont because remember stocks always go up) then my 10,000 investment is worthless due to time decay. But we will get out before that happens, if the stock drops 8% (which it wont cuz remember stocks always go up) then my 10,000 investment is only worth 5,000. So a simple 8% drop and I am down 50%.
This is what is going on in the mortgage security arena. By all sound calculations homes never go down, home mortgages are packaged as AAA sold to pensions and what not. The ones selling them have put that AAA rating to sell them. So if only 8% of the mortgages default (remember the figures bantered around are 10%) the firm or the pension or who ever owns this toxic stuff is now down 50%.
Ahh leverage aint it good!!
As options traders we need to watch this unfold and make sure we are not so leveraged that we cannot withstand the impossible to happen from happening. Homes do go down in value and so does the stock market.
Enough ramblings just wanted folks to have a bit of understanding as to why a few home owners walking away from their home is causing such scare.
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2 comments:
problem I have is a 'bailout'...these leveraged hedge fund guys took all the profits; now when they are loosing they want government help!
It's like Chrysler, the airlines and Bear Stearns...all the big companies want capitalism as long as they make money as soon as they loose they want a 'socialist' handout system where the government(public) bails them out!
I saw the bear stearns stuff and was like "Hey are we living in Canada or Europe now where the government just buys flailing industries that can't compete on their own!"
If you look at any of the candidates for office, they all have the same mentality. Now we are not here to discuss politics, however you have to know the political climate in order to make wise trades.
For exampple, if you like it or not, the gov is determined to stave off a severe recession. How they go about it is up for debate, but regardless of how you or I feel this should be handled, the bottom line is the gov is going to pump more money into the system than I have seen in my lifetime.
Trade off of this. As the common man gets eaten alive, you can make a small fortune. Looking at this environment, what is going to go up and what is going to go down over the next 1-2 years, and trade that way.
I am soo conservative, yet I need to trade as I see stupid politician react. Just as we knew the bailout was coming, we also know the rewards we are about to reap from this i.e. inflation and a collapsed dollar. These two events are certain. The only question is the degree and for how long.
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