looks like gonna be an ugly start for wall st.

[Beacon]

Date: 3/2/2009 8:00:03 PM
Author: Dancing Fire
nothing wrong with selling naked puts as long as you don''t mind owning the stock at the strike price. methink the S&P will hit 660-650 sometime this week.

Sure DF, but you have to have enough cash to buy the stocks if they are put to you. This is called collateral. Turns out AIG did not have any reserves to cover the huge risks they are writing. This is otherwise known as insurance fraud.

Like if I said I will insure your life for $20 million but when collection times comes, turns out I have no money to pay off the policy. In this case those policies were written to balance off risk that is now coming due in a big way, so here we are.

 

[Dancing Fire]

Date: 3/3/2009 11:41:46 AM
Author: Beacon

Date: 3/2/2009 8:00:03 PM
Author: Dancing Fire
nothing wrong with selling naked puts as long as you don''t mind owning the stock at the strike price. methink the S&P will hit 660-650 sometime this week.

Sure DF, but you have to have enough cash to buy the stocks if they are put to you. This is called collateral. Turns out AIG did not have any reserves to cover the huge risks they are writing. This is otherwise known as insurance fraud.

Like if I said I will insure your life for $20 million but when collection times comes, turns out I have no money to pay off the policy. In this case those policies were written to balance off risk that is now coming due in a big way, so here we are.

true, wonder how many private accounts gotten hit with puts (i.e. AIG,C,LEH,etc..) and didn''t have the funds to cover.

 

[tradergirl]

You can start with Warren Buffett. He''s been writing naked index puts for years apparently (European style though) and they are biting him in the A$$. I think I bought some from him in ''07. LOL

He claims of course since they are European style they aren''t really "worth" what they''re selling for now. So in a way, he''s like Citicorp. His toxic a$$ets are really not that toxic if you just use fantasy values instead of today''s market values on your books.

 

[beebrisk]

Date: 3/3/2009 11:08:51 AM
Author: tradergirl
Beebrisk, a lot of us thought the worst case scenario was that he would become Carter. Now we only hope he can rise back to the level of Carter. This administration is a disaster already. The good news is that it is bringing the conservatives back together in a hurry. The country will follow, except for a few of the dilettantes who are more concerned with Michelle Obama''s arms and fashion. Of course, those are all 24 year olds or fashionistas with a trust fund.

Lol...

And let''s not forget that while Carter was decimating the economy, the militants overseas spent 444 days making a fool of him to the world.

Interesting parallels perhaps? Especially in light of the fact that I''ve heard nary a mention of Homeland Security since what? January 21st?

Meantime, maybe Michelle will get a little credit for a retail "bump" with the sale of sleeveless, spring dresses. (I wouldn''t put it past CNBC to feature make up that story!)

 

[Beacon]

Date: 3/3/2009 12:01:48 PM
Author: tradergirl
You can start with Warren Buffett. He''s been writing naked index puts for years apparently (European style though) and they are biting him in the A$$. I think I bought some from him in ''07. LOL

He claims of course since they are European style they aren''t really ''worth'' what they''re selling for now. So in a way, he''s like Citicorp. His toxic a$$ets are really not that toxic if you just use fantasy values instead of today''s market values on your books.

Nope. He is required to mark them to market in real time, generating a 10 billion dollar notational loss in the recent quarter. So he is taking those losses (non cash) now, despite the fact that settlement cannot take place until 2019 at the earliest.

I read with great attention his rationale for the trades. His timing was bad but the concept is reasonable.

In general this type of trade should work out ok. It is well within my area of competence so I did not feel entirely uncomfortable with Buffett''s explanation. His value proposition exploits what he considers a defect of the Black Scholes option pricing model in respect to longer dated options. I could take exception to his logic in one key way: interest rates, an important component of the model. But that is beyond what we talk about here.

Anyhow, to characterize those short trades as "toxic" is probably not accurate. They are at the moment losing money though.

 

[Beacon]

Date: 3/3/2009 11:58:52 AM
Author: Dancing Fire

Date: 3/3/2009 11:41:46 AM
Author: Beacon

Date: 3/2/2009 8:00:03 PM
Author: Dancing Fire
nothing wrong with selling naked puts as long as you don''t mind owning the stock at the strike price. methink the S&P will hit 660-650 sometime this week.

Sure DF, but you have to have enough cash to buy the stocks if they are put to you. This is called collateral. Turns out AIG did not have any reserves to cover the huge risks they are writing. This is otherwise known as insurance fraud.

Like if I said I will insure your life for $20 million but when collection times comes, turns out I have no money to pay off the policy. In this case those policies were written to balance off risk that is now coming due in a big way, so here we are.

true, wonder how many private accounts gotten hit with puts (i.e. AIG,C,LEH,etc..) and didn''t have the funds to cover.

Probably fewer than you think. Most private accounts are not approved to write naked options. When they are, substantial collateral is required to hold the postions. If the postions go the wrong way, the account will be required to cover, e.g. margin call. No ability to cover? The short will be brought in and the broker will deal with the account one on one.

Remember, options are a zero sum game, so someone is on the other side of that trade making big money.

 

[Miranda]

http://online.wsj.com/article/SB123604419092515347.html

 

[tradergirl]

I know he''s required to mark them to market but he''s rationalizing them. The Black Scholes argument is a bit dicey since none of us have seen anything like this in our lifetimes, including him. The old assumptions are not good anymore.

 

[tradergirl]

From NRO Online

In his intro, Matt Lauer mentioned that a third of people polled below 6,000 in the not too distant future.

Jim Cramer: We''re going lower. I think we could bounce periodically, but this is a bad market, and I don''t think people should be counting on it for anything positive.

Lauer mentioned Cramer''s earlier words of praise for Obama, and Cramer responded, "We have an agenda in this country now that I would describe as being a radical agenda. I think that we had a budget that came out that has put a level of fear in this country that I have not seen ever in my life,and I think that changed everything."

When Lauer responded, "so the polices are not shareholder-friendly?" Cramer offered a classic bug-eyed response: "Shareholder friendly? This is the most, greatest wealth destruction I''ve seen by a president! ... The stock market is the country right now! This is where people''s wealth is, this is their pension plans, their 401ks, their IRAs!"

On Election Day 2008, the Dow Jones Industrial Average closed at 9,625.

On Inauguration Day 2009, the DJIA closed at 7,949.09.

 

[Beacon]

Date: 3/3/2009 2:07:44 PM
Author: tradergirl
I know he''s required to mark them to market but he''s rationalizing them. The Black Scholes argument is a bit dicey since none of us have seen anything like this in our lifetimes, including him. The old assumptions are not good anymore.

I do not think that the current malaise disrupts Black-Scholes at all. From what point of view do you think that model is disrupted? Actually it is working just fine. Buffett sold some options, the market moved against him, the model reprices the options higher, which is bad for Mr. Buffett.

He was pretty blunt about whose fault it would be if the trade goes wrong: he took complete responsibility.

I agree w/ you on Obama tax budget. I think he wants to totally destroy the capitalist system. It was jaw dropping to read it last week. Market reacted accordingly. I am hoping the Senate kicks out some of that nonsense. Who knows.

 

[fleur-de-lis]

Date: 3/2/2009 6:15:18 PM
Author: tradergirl
Um . . . . the most violent and destructive part of this crash has been in the last two months.

post hoc, ergo propter hoc

Just sayin''.

 

[Dancing Fire]

Date: 3/3/2009 1:34:29 PM
Author: Beacon

Date: 3/3/2009 11:58:52 AM
Author: Dancing Fire

Date: 3/3/2009 11:41:46 AM
Author: Beacon

Date: 3/2/2009 8:00:03 PM
Author: Dancing Fire
nothing wrong with selling naked puts as long as you don't mind owning the stock at the strike price. methink the S&P will hit 660-650 sometime this week.

Sure DF, but you have to have enough cash to buy the stocks if they are put to you. This is called collateral. Turns out AIG did not have any reserves to cover the huge risks they are writing. This is otherwise known as insurance fraud.

Like if I said I will insure your life for $20 million but when collection times comes, turns out I have no money to pay off the policy. In this case those policies were written to balance off risk that is now coming due in a big way, so here we are.

true, wonder how many private accounts gotten hit with puts (i.e. AIG,C,LEH,etc..) and didn't have the funds to cover.

Probably fewer than you think. Most private accounts are not approved to write naked options. When they are, substantial collateral is required to hold the postions. If the postions go the wrong way, the account will be required to cover, e.g. margin call. No ability to cover? The short will be brought in and the broker will deal with the account one on one.

Remember, options are a zero sum game, so someone is on the other side of that trade making big money.

depends...say for example i sold 1 naked put contract of LEH ($50 strike price) when LEH was trading at $150 as we all know now the stock became worthless in 3 trading days, in this case they couldn't do much about it if i didn't have enough money in my account to cover the puts. all they can do is sell everything in my account,but what happens if my account still came up short of money to cover the puts?

 

[Beacon]

Could happen, but LEH did not go from 50 to 0 in one day. There were plenty of intermediate prices. What I recall is that certain financial stocks at that time (and now too i think) had much higher than normal margin requirements due to the uncertainty.

Most brokers would have required a margin amount darned near the max loss. In the case you mention, the max potential loss is totally known at the start of the trade, e.g. short LEH put w/50 stike is max 5K loss. So it is likely that people did have that in their accounts.

 

[Dancing Fire]

Date: 3/3/2009 6:23:04 PM
Author: Beacon
Could happen, but LEH did not go from 50 to 0 in one day. There were plenty of intermediate prices. What I recall is that certain financial stocks at that time (and now too i think) had much higher than normal margin requirements due to the uncertainty.

Most brokers would have required a margin amount darned near the max loss. In the case you mention, the max potential loss is totally known at the start of the trade, e.g. short LEH put w/50 stike is max 5K loss. So it is likely that people did have that in their accounts.

not in one day but it sure didn't take long to get to almost 0. anyway,1 option contract = 100 shares of stock

during the high tech bubble era a friend of mine open an account with 100k ,he then purchase 200k worth of those high flyer stocks and as those stocks kept on going up,up,up, he kept on margining to the max,of course everything is fine as long as the market kept on going up day after day

then the bubble bursted.the NAZ tanked so fast in just a few days he got a margin call for over 300K

he didn't have the 300k to cover his margin call,so he just let the broker close his account,just like the people walking away from their mortgage today.

 

[tradergirl]

Obama says that the market is a buy based on "profit to earnings" ratios. Oh god, it''s going to be a long 4 years . . . .

 

[Beacon]

Did he really say that? Oh crap.

 

[Beacon]

Date: 3/3/2009 7:35:26 PM
Author: Dancing Fire

Date: 3/3/2009 6:23:04 PM
Author: Beacon
Could happen, but LEH did not go from 50 to 0 in one day. There were plenty of intermediate prices. What I recall is that certain financial stocks at that time (and now too i think) had much higher than normal margin requirements due to the uncertainty.

Most brokers would have required a margin amount darned near the max loss. In the case you mention, the max potential loss is totally known at the start of the trade, e.g. short LEH put w/50 stike is max 5K loss. So it is likely that people did have that in their accounts.

not in one day but it sure didn''t take long to get to almost 0. anyway,1 option contract = 100 shares of stock

during the high tech bubble era a friend of mine open an account with 100k ,he then purchase 200k worth of those high flyer stocks and as those stocks kept on going up,up,up, he kept on margining to the max,of course everything is fine as long as the market kept on going up day after day

then the bubble bursted.the NAZ tanked so fast in just a few days he got a margin call for over 300K

he didn''t have the 300k to cover his margin call,so he just let the broker close his account,just like the people walking away from their mortgage today.

Right DF, and if the strike price is 50, and you are short the put and it goes to zero, your loss is 100 shares * 50 = 5K.

My DH, who at the time was my boyfriend, got a margin call during that tech bubble burst. He called me all concerned what to do. I told him, the one thing you do with a margin call is you do not put up more collateral, you sell the stock. He was shocked, he asked if I was sure. Yup, very sure. He sold Sun Micro at 103 on that margin call. Lucky guy! I think that is why he married me.

 

[tradergirl]

These are funny (scroll down)

http://michellemalkin.com/2009/03/03/obamas-new-mark-of-the-porkulus-beast/

 

[strmrdr]

The big problem is that houses and stocks are still over priced for the value they have.
I have been saying for years there was way to much money in the market and not enough value.
That is true in both markets.
Anyone on wall street or in the .gov who didn't see this coming is an idiot.

It was made worse by the lowering of interest rates to keep it at an artificially high level instead of letting it slowly back down.
They ran out of rates to cut.

The only way it is going to rise back to that level anytime soon is hyper-inflation aka 1930s Germany and we know where that led.

 

[stone_seeker]

stocks will continue to go down. How else will stock owners fund that 2 trillion of extra tax they will be paying in the future?

Going to still get worse before it gets better. The administration is balancing the inequities over the past few years and part of that is to take wealth from people who own stocks in the form of higher taxes. Hopefully it works. I didnt vote for Obama but we''re all in it together now.

best of luck to everyone.

 

[tulip928]

Date: 3/2/2009 6:43:01 PM
Author: strmrdr

Date: 3/2/2009 6:40:36 PM

Author: rob09

Here we go again ... what a pointless ''discussion''. The usual suspects will believe what they want to - so just go ahead an have a private Obama bashing party and self-indulge in framing the current economic situation just the way you like it. Have fun.

just like the libs blamed everything on Bush?

Exactly. If Bush was to blame for every day of that "eight years of Bush", then Obama defenders take note: the responsibility for his actions - his "eight years of obama" began Jan. 20. and he''s at the helm. Bush is gone and has nothing to do with the wild spending of Obama and callousness of towards Wall St. and capitalism. Be prepared for the new lower standard of living, America.

 

[beebrisk]

Date: 3/5/2009 7:01:16 AM
Author: tulip928

Date: 3/2/2009 6:43:01 PM

Author: strmrdr

Date: 3/2/2009 6:40:36 PM


Author: rob09


Here we go again ... what a pointless ''discussion''. The usual suspects will believe what they want to - so just go ahead an have a private Obama bashing party and self-indulge in framing the current economic situation just the way you like it. Have fun.

just like the libs blamed everything on Bush?

Exactly. If Bush was to blame for every day of that ''eight years of Bush'', then Obama defenders take note: the responsibility for his actions - his ''eight years of obama'' began Jan. 20. and he''s at the helm. Bush is gone and has nothing to do with the wild spending of Obama and callousness of towards Wall St. and capitalism. Be prepared for the new lower standard of living, America.

Personally, I won''t lay the blame entirely on Obama. I dunno about anyone else but for some reason I keep hearing, over and over, those two little words Barney Frank whispered in our ears awhile back: "Fundamentally sound."

3 years of a Dem congress, 2 months of a Dem prez and here were are---in the krapper!

 

[tradergirl]

We''re now sitting on an uptrend line that goes back to 1982. I find this almost incomprehensible.

http://image.minyanville.com/assets/FCK_Aug2007/File/Theale/M%20--%20S&P%201980%20to%20current%20final.gif

You don''t want to know what happens if that breaks. Hello Black Monday.

 

[Beacon]

That is a ferocious looking chart! It would not look so scary if it were a log scale:

http://finance.yahoo.com/echarts?s=%5EGSPC#chart1:symbol=^gspc;range=my;indicator=ema(65)+split+sma(12)+volume;charttype=ohlc;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

But what a monster of a bear we are in. No one alive has dealt with one like this before. It''s worse and faster than 73-4.

 

[Dancing Fire]

at the rate we''re going the Dow and the S&P will hit 0 within a few months.

 

[fleur-de-lis]

Date: 3/5/2009 10:45:16 AM
Author: tradergirl
We''re now sitting on an uptrend line that goes back to 1982. I find this almost incomprehensible.


http://image.minyanville.com/assets/FCK_Aug2007/File/Theale/M%20--%20S&P%201980%20to%20current%20final.gif


You don''t want to know what happens if that breaks. Hello Black Monday.

Interesting article. Thanks for posting it, Tradergirl.

Of course it raises an interesting point. Not to say something that might seem confrontational based on your earlier statements on this thread, but in the totality of your postings I''ve sensed a part of you that prizes analytical thought, so here goes: doesn''t the article you posted support the argument that the collapse of hedge funds (and finding out just how many people have been "swimming naked", heh, love the analogy) might actually be more of a *direct and logical* cause of what we''ve been seeing in the markets since Autumn?

 

[tradergirl]

It''s a big factor for sure. You don''t see me crying. Here''s the real killer. These people were probably 50% of Leon''s business.

The End Of The Hedge Fund Compensation Bonanza
Posted by Tyler Durden at 12:49 PM
Listen to this article. Powered by Odiogo.com
Everyone knew it was going to happen just not when. The when is now, according to Jon Pierson president of recruiting company 10X partners as quoted by Hedge Fund Alert. Latest market data indicate that the base salaries for portfolio managers working for medium hedge funds in the $300-$500 million ballpark, have dropped by almost 50% from $300,000-$350,000 to $175,000-$200,000, and even veteran PMs are seeing their base cut.

Additionally, performance pay will be whacked too: while PMs may not make any money at all if their books or funds have lost money (great to know if you are raking in $$$ on those shorts while all your colleagues are perma bulls and about to scuttle your fund), their percentage of the fund''s performance fees (assuming you don''t have a Citadelesque 100% to climb before you hit your high water mark) will be cut drastically and much better performance will be needed to even get back to historical payoff levels. Lastly, if PM''s previously counted on getting 1% on the management-fee of the overall fund, this number will now be 0.50% and even 0.25% in most cases. Oh, and about those guarantees and signing bonuses... history.

So if you are a fund that is so low under the high-water mark that you will likely not earn performance revenue for years how do you hire talent - well you simply start offering "points" or "ghost shares", essentially a cut of future "profits" in lieu of a discretionary bonus, and pray the potential hire won''t bitchslap you.

And if you are an unemployed PM what do you do? The most sought after positions are for PMs who have experience in liquid strategies, long/short equity, global macro, high frequency trading and distressed debt analysts. Or alternatively you can go work for boutique broker/dealers. Only problem is if you specialize in CDS, as no boutique banks have the balance sheet to trade credit derivaties so at best you will be stuck pushing 2-3 million of some garbage bonds to naive retail investors and praying for a wide bid/offer spread.

 

[TravelingGal]

msnbc posted the business week article on the stock market not liking obama.

http://www.msnbc.msn.com/id/29532976/page/2/

 

[TravelingGal]

sorry, here''s a better link...

http://www.msnbc.msn.com/id/29532976/

and the title is stock market not sold on obama

 

[fleur-de-lis]

Date: 3/5/2009 3:20:45 PM
Author: TravelingGal
sorry, here''s a better link...


http://www.msnbc.msn.com/id/29532976/


and the title is stock market not sold on obama

By that analysis, it also wasn''t that crazy about Reagan either:

The Daily Show: "The Dow Knows ALL......"