Tuesday, July 29, 2008

July Trading Update

It's been a busy month trading. I guess I better publish my "July" update before August.

First, familiarize yourself with my last update.

I sold (short) July 7.5 puts for .60 in FirstFed Financial - FED. This was to spread some premium against my October 22.5 and January 15 puts. First Federal Corp was trading around $9 per share when I made this ill-timed trade. Ill-timed because FED dropped as low as $2.91 before July expiry - well past my breakeven price of $7.00. Sure I want FED to dump all the way to zero, BUT not right after I sell some puts! The stock had dropped precipitously, the puts were "fat", and I thought the financial sector was ripe for a bounce....all of which was absolutely correct, but, again, I was too early.

Fortunately, the stock did bounce and I covered these July 7.5s at $1.20. I even went long these particular puts at .50 with two days before expiration. I bought stock against them at $7.02 so the purchase became a wash (I was unable to flip the shares).

According to Yahoo Finance, a whopping 81% of FED's available float is sold short!

What does that mean? Well, it effectively means the stock is heading to zero. Wall Street has bet against survivorship.

Now, moving on to Wells Fargo. As you can see above, my holdover short positions did well on this slow drift down from $32 to near $20 a share. I was also shorting the bounces for small scalps:

I shorted more WFC 24.72 and 24.14.....covered at 22.90.

And I also shorted WFC at 22.12, buying it back at 21.55.

Then disaster struck. I added to my core short position at $24.31 and the watched the stock plummet to multi-year low of 20.46. All along, my long term target for Wells was around $20 a share. I've never really adjusted that goal. Note also that just about every financial company I have shorted this spring has gone WAAAAAAAYYYY lower after I have covered (FNM, COF, BAC, C,...). So covering my core WFC short position (short shares and Oct 30 puts) wasn't really on my mind. For an instant, I did consider taking some off the table. But, really, with everything going on (California real estate collapse and $135 oil especially), the future outlook for Wells Fargo is less than sanguine. Sure, there may be a rally if oil dips to $100, but how long would any such bounce last? Mostly, I've been thinking more along the lines of "Why aren't I shorter?" than "Where should I cover?".

Nonetheless, obviously in hindsight I should have covered some. Wells reported earnings and a dividend raise last Wednesday while I was out playing Long Island National. I came back, saw WFC up $3 and shorted more. Then I shorted more with it up $5 on the day. Unfortunately it finished up a whopping $7 - nearly a 35% jump. All this was on *fraudulent* earnings, a subject for another post. Are things, despite all other evidence, really going well enough for Wells Fargo to raise their dividend? I think not.

Now, keep in mind that Lehman Brothers Holdings raised their dividend in January with their stock trading $62 per share (Ah, the good ole days). Today it languishes at $17.65!

On the subject of Lehman. Some guy that I played golf with at Montauk Downs told me his buddy "was a big Lehman guy", that "he worked there for years", and had amassed "over $5 million worth of stock" that is now worth relatively nothing (merely $1 million). These are the chums faced with the torturous dilemma - "Do I sell here and lock in my remaining $1 million or do I ride out the storm and pray?"

Regardless, with WFC at 27.93, I still have three losing trades in my account - shorts at 24.31, 23.95, and 26.45 - that I am going to have to deal with one way or another.

I have put a toe into the palladium market - buying Stillwater Mining January 2010 15-strike calls for $2.40 apiece.

I also bought a little North American Palladium at 5.09.

Running down my account activity I see that I got in QQQQ at 44.46 out at 44.88. Who knows why? I must have had a mediocre reason for that trade.

There was an earlier big *short squeeze* day - July 8th I believe. All I did then was short a little more Simon Property Group Inc. (the mall REIT) and AvalonBay Communities, Inc.

I shorted SPG at 90.75....and covered the next day at 88.10.

I shorted AVB at 91.48....and covered the next day at 89.73.

I cashed out my UltraShort MSCI Emerging Markets ProShares - ticker EEV at 84.70. I bought it at 63.16 on May 22nd this year. Yeah baby, a winner!

I added to my losing CDE position at 2.44. Then the other day I dumped it at 2.45 so I could do other things.

Likewise, I covered HRB, one financial short that just didn't work. I covered it at 24.16; my original cost basis was 19.70. Glad to be done with that one. Now it will tank, just you watch.

Here's another winner. Just before the big financial *short squeeze*, I sold my July 80 puts in HBC for 7.20. Those, I had bought back in June for a mere 1.30 apiece.

I am also re-establishing my short US Treasury position. Yeah, that's the trade that killed me in the beginning of this year. However, I am doing it via puts for now to give myself some more of a timing cushion. Ideally, these trades should be done with futures options but most of my free capital is in my brokerage account.

I bought December 89 puts on iShares Lehman 20+ Year Treasury Bond (ETF) at 2.50.

And I bought January 83 puts on iShares Lehman 7-10 Yr Treasury Bond (ETF) at 1.45.

Lastly, into this massive short squeeze in the financials (and REITs) I added to my core UltraShort Real Estate ProShares position at 98.29.

And I initiated a UltraShort Financials ProShares position - buying SKF at 140.03, 133.25, and 132.79 on the way down and a day or two too early from perfection.

Almost forgot, I shorted Bank Of America Corp at 30.55.

Shoot, can y'all believe the summer's already over?

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