Wednesday, May 06, 2009

Marginalizing Mish Math

General Motors is effectively wiping out its shareholders via dilution. The stock is currently trading at $1.66 per share. Here's what Mike Shedlock, aka Mish, wrote yesterday:

If GM's demise comes on or before May 15, then holders of 60,671 PUTs will see the value soar from 3 cents to 99 cents equating to a gain of 3000+%. I am not recommending this play, but I sure as hell would not want to be the writer of those options.

Ah....excuse me, Mish,

If 60,671 puts lose .96....that's only a total dollar loss of a paltry $5.8 million. I'm quite sure those Moronic *option writers* can handle it. Not to mention many of them may have *spread* them off, or shorted the underlying against them.

You see, OPM ("other people's money") traffickers like Mish look at everything in terms of *yield* and *percentage move*.

3000+% move!!!!!

Oooooohhh. Wow.

Meanwhile proprietary traders like me see everything in terms of *gross dollars*.


JReality said...

Mish's mistakes are not a big deal compared to the complete idiocy of Jim Cramer and the rest of the cheerleading clowns on CNBC who think this is a new Bull Market.

I just hope we get a pullback in the stock indices soon. I don't know If can take much more of this nonsensical rally. I substantially added to my index shorts today, and I'm not going to cover any of it until the market is overSOLD on a short term basis.

Anonymous said...

$5.8 million is paltry? That's cool, your FAZ bet won't lose anywhere near that much, right?

Anonymous said...

GM told state street to completely sell GM stock in the GM Common stock fund in the GM 401k. They never informed their employees who were invested in the fund hoping for a stock rebound, they were doing this until it was completed. What does that tell you about the prospects of GM if even they have decided to start selling the stock?

CaptiousNut said...

$5.8 million is nothing for 60,000 option contracts - and let's also point out that ZERO hasn't happened yet.

Do you think that anyone who *wrote* them didn't see imminent bankruptcy as a risk? And that they didn't layoff the risk to some extent?

As for FAZ...I wish I at one time had $5.8 million to lose.


That is kind of funny about GM - in a perverse sort of way.

Anonymous said...


I thought you would enjoy this article about how your tax dollars are utilized. When are you going to move North and join the live free or die state? At least your one masshole I would welcome with open arms...


Funny Circus Bears said...

I know it is pointless to try to convince you to stop holding the 3x ETF’s for more than one trading session, but perhaps you will look at shorting FAS in lieu of being long FAZ, assuming you can borrow shares. The upside is higher and the downside less so.

Anonymous said...

Mortgage resets are coming folks...

Funny Circus Bears said...

The graph above has been around for quite awhile now - I would be very interested to see it updated to reflect current conditions, i.e., how many of those O/A and Alt.A's have refi'd out into FRM's in this low interest environment, if any.

CaptiousNut said...


Shorting FAS may be *safer* but mathematically it can't have more upside.

I did the math; I calculated the *decay* and placed my bets anyway. I knew what my risk was - I just didn't think BAC would quintuple off its low. I didn't think there was a chance in h*ll in this economic backdrop that WFC could triple from its nadir; Etc.

Again, I cut my teeth trading options which decay a whole lot faster than levered ETFs. So I'm not afraid of *timely* bets - even if in this instance perhaps I really should have been. My breakeven is probably about $14 here.

And I know it will have a hard time even getting there if we have a few more violent whips.

CaptiousNut said...

Mish dealt with that graph recently.

Though I would rather hear Mr. Mortgage's take.

CaptiousNut said...


I would never, ever move north.

Unless I was currently somewhere on the Southern hemisphere.

Plus, you guys voted for the *messiah* up there.

Funny Circus Bears said...

I haven't calculated the decay, but let’s go back to the beginning of the year and look at three periods of substantial movement in the financials:

Jan. 6 to Jan. 20: Financials were tanking.

FAZ went from 34 to 80, a 135% gain.

FAS went from 26 to 8, a 225% gain on a short position.

Feb. 26 to Mar. 6: Financials were tanking.

FAZ went from 55 to 105, a 91% gain.

FAS went from 6 to 3, a 100% gain on a short position.

Mar. 6 to present: Financials rallying.

FAZ went from 105 to 5, a 95% loss.

FAS went from 2 to 10, a 80% loss on a short position.

Both of these ETF's have a natural downward bias over time (decay). If you insist on holding these things, it makes sense to exploit that bias by being short rather than long.