Scaling in to Hedges

Still small compared to earlier this year, but dipped my toe back in the FAZ pool just now (went long the shares of this turbo-charged financial 3x bear ETF).

I still hold the short Jan strangle position, but that combination strikes at $16 on the put and $20 on the call, and the total premium collected covers me down to about $5 a share or up past $30 if the market rally in financials continues or the crash comes again.

Just like I guessed in my prediction of a prepays-fast-prepays-slow “S Curve” for mortgage investors, I think we’re seeing the first part of a whipsaw right here in financials.  My reasoning after the break.

Today’s news on Basel III (not effective until two more bull/bear four-year market cycles) took away the mandate for additional capital and lower ROE at banks.  They’re free to speculate to their heart’s content for another eight years or so.

So that leaves reality and market discipline to bring them back to earth.  OK.  I can live with that, since rallies like the one today in the financials have all the signs of sucker plays.

About the time Joe Retail gets back in, the hedgies will lower the hammer.  They still have all the free reign they need to de-fund any financial by overwhelming the CDS market, and no one will know until it’s too late.

Remember, when a third party “buys insurance” on a borrower, they are using up part of the market’s ability to take exposure to that borrower.  In Lehman size, it means the borrower will be insolvent.

I’m not saying the goal is to put some banks out of business, but a good run up and run down in stock prices, driven by excess lending and then none…  well, that’s the kind of play these new Masters of the Universe live for.



2 Responses to Scaling in to Hedges

  1. k butler says:

    nice post howard.. something aint right about this market

  2. Steve Meyer says:

    I am long FAS instead because the hedgies are dependent on the
    large banks for leverage lending so they will not bite the hand
    that feeds them. Also for the hedgies that blow up with OPM, they
    will need a job somewhere, i.e. a bank. I agree that short options
    are needed to deal with the 3x multiplying. I think banks are a
    strong buy.

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