OptionPundit

Tag: GS

  • Goldman Sachs (GS)- A Potentially Profitable Opportunity

    Goldman Sachs (GS) is down $40 since April 16th; How much more it has to lose? Anybody’s guess is probably better than mine. Regardless of whatever I think, I guess they are too big, powerful and connected to go under.

    With that bullish bias, here is a trade idea that potentially can deliver excellent results on upside. But wait a min, what if I am wrong? It can still make some gains on downside as long as GS is either above $159.4 or below $130.6 by June expiration. Pls don’t read any further if you think GS will remain in between these strikes by June expiration and/or if you can’t adjust the trade for risk/profits beforehand.

    Before you read further, I suggest reading about backspread so you are familiar with this wonderful strategy.

    (If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is via invitation only)

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  • What Exactly is Option Trading?

    A Fascinating Friday ! That’s how I can think about Market’s action on Friday. Option trading is not only about attending a seminar, do some paper trades, get some winning trades and the stage is set. It is also about constantly evolving your own trading style and continue to sharpen your saw. With this post I hope you pick up one or two important nuggets that might add value to your trading style, so pls just relax and continue to read.

    First a simple one VIX– I mentioned on April 15, that I was not convinced of rally when markets are overbought for 6 continuous weeks; and shared my bias for bearish stand via $VIX bullish spreads.  Those OPN Members who followed it generated about +28.5% returns for 2 days holding. It could have been done with straight calls, but I wanted to minimize risk exposure without compromising delta.

    The King of Earnings- Google (GOOG)
    It was once in 6 months (if not 3) type event i.e. earning announcement just before Option Expiration. Those who have been with OPNewsletter for past 3 years, or at least have been reading OptionPundit blog, know how much I love trading Google.

    To begin with, I shared 4 different types of trades that could have been done on Google. Nothing much has changed Feb’07. However, this time, for OPNewsletter members I used one of my high yield/low risk/technical/intuition based strategy, Double Butterfly. We opened Google 540/550/560 Put Butterfly and 600/610/620 Call butterfly; for roughly $1.40 to $1.70 price combined.

    Google opened at $568 thus panicking some members, as it means 100% “potential loss” on this speculative trade. Based on “what if” scenarios I shared before markets opened, few members could still get out of the trade in “style” for break even or minor gains/loss even though Google was still out of our profit zone.

    But guess what, Google was pinned at $550, those who held till close, yielding almost +588% gains!!!

    But that’s not the end of the story, I traded Google almost live (though not recommended to members). I kept on switching between Calls and puts, resulting into +46% gains (bearish), then +21% (Bullish), then +95% (bearish), then +54.6%, (Bullish) then -12% loss (Bullish). Those who were following the thread live and could trade speculative (though not intended), could have still converted $1 into $10 by the end of the day!

    Google again, 95% gains; again out, i need to see if it can hold $560, if not, next may be $557…i am sharing almost real time to share how quickly i am changing my opinions….pls note, at one time, i have only one direction either bearish or bullish..i am not mixing two..(i have already close the 550 puts (i further broke the Bull put spread into individual options leg and purchased the short 550 puts, and still kept the 540 puts)

    added later, by the time i finished my msg, google was already below $556 and those puts were already quadrupled.

    Here is the screenshot of key trades I mentioned above-

    Google Intraday Transactions

    We didn’t even touch on Google Stock pinning as otherwise it would have just too much of trading to handle for a single trading day. Here are some excellent reads for OPNewsletter members on how to successfully play stock pinning, especially on Google. I also run a separate experiment (income trading strategy) with Google for following set of conditions – 1) Expiration week, 2) Earnings in that week but before expiration day; the gains were +18% within a few days even though google moved significantly against the “market neutral” strategy, before the earning day. I shall share this in another post.

    Here is another example of ISRG–

    Another stock I am looking at is ISRG, I had expected it to move about $20-$25, but it hasn’t…I don’t know if it will if drops below $372…I didn’t share it yesterday (i mentioned my bias on twitter though– http://twitter.com/OptionPundit/status/12171040022 ) as the options are not very liquid.

    ISRG closed at $360.39!! I am not mentioning Goldman Sachs (GS).

    Now the key points, why am I sharing all this? Recall back in early 2008 I shared on key factors that contributed to a record year (till then) for OptionPundit. Here are some additional thoughts.

    The Formula for Long Term Success
    Speculative trades should only be done with what you can feel comfortable losing, I must add, losing 100%. This is not income trading which many OPNewsletter members trade with over $100,000 and anything x 0=0

    This is a high risk/high yield scenario. The formula of long term success is

    Long Term Success = (Profit $$ x Winning Trades) > (Loss $$ x Losing Trades)

    Don’t be stubborn with your opinion–
    One shouldn’t marry to a single opinion. Markets can humble anyone, anytime and it has demonstrated time and again. No one will always be right else there won’t be a trading market. Keep agility and flexibility as your competitive advantage. Remember, the end goal is not to be right rather it is to make money. I encourage OPNMembers to re-read the whole speculative thread (May 2010) how often I changed my opinion between bullish and bearish, the same day, often in less than 30mins.

    Trade with a plan and be nimble
    I didn’t send alerts for these Google trades for OPNewsletter Members, only demonstration. I don’t put stop loss on the screen as I don’t want it to be shown to brokers. I keep a mental stop loss and write it down and close it. Why am I sharing this? Because one may say, with “hindsight bias”, that there was no need to trade so much, you would have made a 1000% gains (10times) if you just held those 560 puts till expiration; I was not in for a 1000% gains, I was trading and time value was against me, and I was just following my trading plan.

    Option Trading is both Art and Math
    The twin butterfly we opened would have been a 100% loss if Google were to close above $560. But breaking the flies into vertical spread, then finally into singles achieved great result for even those who panicked and wanted to get out to collect “whatever” was left. Options are very versatile, so just don’t 100% loss. Create “what if” scenarios for if it goes up, goes down or move sideways. No one is much more in touch with your trades as you are and hence prepare in advance yourself and don’t just panic. Panic never helps, it about keeping the big picture mind and bringing that to trading world. Trading is equally tough like any other business, if not more.

    Here are some additional thoughts on how to become a more profitable trader.

    More trades to come. There are more companies announcing earnings in next few weeks so stay Tuned,

    Profitable trading, OP

  • The Geithner Put – The Public Private Investors Partnership Fund

    The Geithner Put – PPIP Plan

    I have been thinking about this for a while on how best to simplify and John Hussman did an excellent write-up to explain his thoughts, similar to mine, about this whole PPIF program. So without any modifications, let me share what what he thinks-

    Last week saw a continuation of the impenetrably misguided policy response to this financial crisis, which seeks to address the downturn by encouraging more of what got us into this mess in the first place. The U.S. Treasury’s toxic assets plan, for instance, looks to “leverage” public funds (with the FDIC providing the “6-to-1 leverage”) in order to defend the bondholders of mismanaged financials who took excessive leverage. At the same time, the Treasury plans to limit the “competitive bidding” to a few hand-picked “managers” who will be encouraged to overpay thanks to put options granted at public expense. This is a recipe for the insolvency of the FDIC and an attempt to bail out bank bondholders using funds that have not even been allocated by Congress. The whole plan is a bureaucratic abuse of the FDIC’s balance sheet, which exists to protect ordinary depositors, not bank bondholders.

    If you have not yet read the plan, I think you should. This is a plan that is being used as “panacea” that is probably going to solve all the issues(Download it here)

    So what is the plan-  Sample Investment Under the Legacy Loans Program

    • Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
    • Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
    • Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
    • Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
    • Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
    • Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC

    The internet is filled with comments from all the over the world. Famous economists have already expressed their opinions. I shall share my simple thoughts (rather questions). I hope this plan works, and works well to take us out from the crisis. Hence, I would love to be wrong.

    The PPIF plan allows investors who want to bid on distressed assets to use Treasury matching funds plus FDIC “non-recourse loans” to lever up their investments. The combined leverage is about 12:1, so a hedge fund that wants to buy $100 worth of toxic assets would end up investing about $7 of its own money. What’s more, since the FDIC loan is non-recourse, it means that if the investment goes bad the hedge fund doesn’t have to pay back the loan. It only loses its original $7. What a beautiful deal; For investors, this is a great deal. If the investment does well, they make lots of money. If it tanks, they can only lose $7. I’ll take it.

    However, thinking from the other side-

    • If you are a true business man, first will you offer any non-recourse loan for a “toxic” asset? Will you offer 85% of the loan without participating into any upsides? And without compensating yourself for any downward protection? Who loses the money in case the asset value goes down? You bet it is FDIC. And in fact they are selling this naked put for, guess what, free. Let’s have an example- In the options business, if I sell a Jan 11 BAC 7.5 slightly OTM put, I receive US$4.00 premium, over 50% downside protection (Friday close @7.60). FDIC sells the Geithner put for Free.
    • I haven’t heard of any venture capital offering an 85% funding without assessing feasibility of the business model and future cash flow streams. Fine, so it appears that FDIC has better expertise to value these “toxic” assets than the ones who sold those and are now unable to value it, and brought this crisis. Do you agree?
    • Does anything stop a bank that holds toxic assets from using a proxy to bid for them – moving the assets from one pocket to another, but getting the FDIC to guarantee (part of) them?
    • Does anything stop a bank to bid for toxic assets of another bank? They can put up a few percent of their own money, and swap each other’s toxic assets financed by public suddenly bearing more than 90% of the downside risk. The “investors” keep half the upside while ordinary Americans take the downside. Here is what financial times reports– US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn plan to revive the financial system.” How can they even value the assets of others to come to a bidding price when they can’t value their own? Hello?
    • Let me paint a few more scenarios-I don’t know if Banks have been given a choice to sell “All or None”- a) What if the Banks sells only the toxic assets but not the quality one? b) However, what if the Bank sells only the good assets; use the value from the proceeds of good assets to boost value of toxic asset on their books?
    • And by the way to have an excellent bidding process, there should be good number of bidders. I am not sure how many competitive bidders will be left after eligibility criteria is finalized?
    • Oh btw, where is the little “home owner” in this whole process? How is his/her pain being alleviated? His debt is not being restructured so who is going to stop his home from foreclosure?

    I have more questions than I have answers for. There is some good discussion by Rotorybomb including mathematical modeling. There are good Q&A as well. You may want to read it to acquaint yourself with what’s going on with the plan that is expected to solve the issue. He has done an excellent job to provide a crux.

    I understand, the government is different from a business person and probably need to take steps which are contrary to pure business sense. The plans needs to be attractive enough to have private investors come on board. But at the end, risk is a risk. And risk should be compensated with appropriate rewards or vice versa. Lastly private sectors leveraging brought this crisis, now the de-leveraging is taking place. Now it is the government that is leveraging up. What will happen when the government de-leveraging starts? When and How?

    I don’t know if this is beginning of a new trouble or an end to the trouble we are going through. Only time will tell. In the meanwhile, enjoy the rallies. Trade carefully and go long selectively and in incremental steps should you choose to go long.

    Profitable trading, OP

  • Thrilling Expiration Friday

    rambo3Too much to handle for the week which slowed down the postings this week. What a “Rambo Fed” action that was (I was looking for a picture replacing Bernanke with Stallone but gave up after a few searches). But guess what, was this really surprising, I don’t think so. Uncle Ben has already made this clear long time back.To find out what other tools Uncle still has in his magic box, you may want to read his speech delivered on Nov 20, 2002. For those who would like to know more deflation etc this does make a good reading.

    This “printing press” has created trillions out of thin air, and probably more can be create to fight deflation. The battle is on  by almost every other central banker around the globe. What was remarkable is the action of few things. Gold that shot-up from a low of 890 to 950 within a matter of minutes, EUR surged almost 400 pips (yes 400 pips), resource and commodity stocks shots (so did the Dow and S&P just to gave gains back later). Citi (C) planning for a reverse split and many more.

    Markets are behaving precisely the way expected and the  Nov lows probably will resist the Bulls move. But don’t be surprised if this rally continues further. This rally does have some substance to it and is different from the rallies we have seen so far.

    Today is March options expiration day. There will be plenty of opportunity to trade. If you are looking for some plays, may I point you to AAPL, AMZN, GOOG, GS, POT and may more. OPNewsletter subscriber could look for some real example of how we played google pinning in the past that resulted in +60% profit in a single day.

    Those who are looking for trading thrills SKF, SRS and other ultrashorts will lose a lot a intrinsic value today. The moves will be very strong and leverage will be extremely high.

    Have a Thrilling Friday,

    Profitable Trading, OP

  • Berkshire Hathaway’s worst year, Buffet Speaks, Likes Long Term

    Berkshire Hathaway (BRK.A) had its worst year on record, Chairman Warren Buffet told shareholders Saturday that the economy would remain in “shambles” during 2009 and beyond. His 22 page annual letter is full of wisdom nuggets. Also you may wanna read the annual report. Though I am capturing key points per my understanding, I shall encourage my readers to read the full letter as it offers valuable insights.

    Berkshire Hathaway profits dropped 96%. The per-share book value of both Class A and Class B shares of Berkshire fell 9.6%. For beginners, Berkshire Hathaway has produced a compounded annual gain in value of 362,319% since it’s founding in 1964, about 10 times what you would have gotten investing in the S&P 500, compounded at 20.3% per annum. This includes recent bad results.

    Let’s begin with some context of the economy-

    • “By the fourth quarter,” says Mr. Buffett, “the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.”
    • Government action was needed – ‘Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.
    • What’s needed – “Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects, Inflation is likely to be one such effect, Buffett said. “Moreover, major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly. However, said Buffett, the U.S. government did need to take “strong and immediate action” to avoid a “total breakdown” of the economy.
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  • Johnson Controls (JCI) and Goldman Sachs (GS)

    Johnson Controls (JCI) said it is withdrawing its 2009 financial guidance due to “the rapid decline in global automotive production and uncertain industry conditions.” It paints pretty bad picture for the automotive industry for both US and Europe.  Johnson Controls issued financial guidance on Oct. 14 that was based on 2009 assumptions of 12.3 million vehicles in North America and 21.2 million in Europe. The company’s latest production estimates for 2009 are 9.3 million units in North America and 16.2 million units in Europe.

    For those, who don’t know, Johnson Controls, Inc. provides automotive interiors, products and services that optimize energy usage in buildings and batteries for automobiles and hybrid electric vehicles, along with related systems engineering, marketing and service expertise.

    One of the remaining two pillars of Wall Street, Goldman Sachs (GS) posted a big loss for its fourth quarter, its first quarterly loss since becoming a public company in 1999. For the quarter, Goldman reported a loss of $4.97 per share, a full $1.24 worse than the First Call consensus that called for a loss of $3.73. Net revenues were negative $1.58 billion and the company’s net loss was $2.12 billion. GS is trading higher.

    What remains to be seen is if it will remain the same “Gold”man as it used to be, after converting into a bank holding and coming under govt supervision. Banks doesn’t pay as big bucks as an investment holding (generally speaking) and therefore whether the so called “talent” will stay (current times are different as there may not an option available) to churn gold for its shareholders.

    Profitable Trading, OP