Before posting some longer pieces, I thought I’d update people on some things I’m looking at or doing. As always, I am not providing investment advice. In fact, a couple of these ideas have been money-losers lately, much to my chagrin.
Still, I think it helps to look at unusually high option premia, parabolic stock price movements, and macro hedges when we get markets that seem to be detaching themselves from the real economy.
First, the parabola. IOC did a secondary offering after running from the low 60’s to the mid-70’s, which gave them some of the cash they would need to buy into a future LNG port facility in Papua New Guinea. Today it’s trading in the low 80’s. As beautiful a parabola as I’ve seen in years.
Actual shipping is still years away, but that doesn’t stop IOC from reacting to the daily moves in Henry Hub gas or West Texas crude. Go figure. Disclosure: net short via stock and options positions. Feeling the pain but impressed by the parabola.
Second, huge option premia. One of my long positions is in HGSI. I customarily write covered calls against it. Right now, the calls I wrote have fallen pretty far out of the money. With less than two weeks to expiry, the calls are not coming down in price the way I think they should, so a new position like the one I have had for the past several weeks looks to have a much better risk/reward profile than it had when I entered it.
The position is long the stock (currently at $24.70) and short the November $27 calls. They are bid $2.20 and ask $2.30. For the $25’s, which are still a profit if the stock gets called away, the calls are bid at $3.35. It makes for double-digit returns in less than two weeks, and interstellar annualized returns if the stock gets called.
Warning: The market might be telling us that HGSI has some really bad news coming this week or next, and that even a net purchase price of $21 or $22 after selling the calls is a bad deal.
Finally, the macro hedges. I just can’t get over the size of the run in financials since March of 2009. The latest blast upward seems to discount to nothing the problems the mortgage and real estate markets are still having. Both FAZ and SRS are trading at local lows, apart from slight recovery today.
Maybe the market is telling us that the already-too-weak financial reform law will be weakened even further. I would point out that collapse in 2007/2008 has many fathers, but there’s no way we can blame overzealous regulators or too-restrictive laws.
The underlying real estate still has a deflationary bent to its pricing mechanism (market values). The non-government financing business is still dead. Banks and others still have huge exposure to leveraged real estate that is underwater.
I just don’t see how it’s a positive that the crew that put their faith in the magic of markets have retaken control of the House of Representatives. Do they actually believe that our problems are caused by too much regulation, or is that what their contributors want them to say?
I fall firmly into the camp that we are doomed to repeat our mistakes because we haven’t learned from them.
The mREITs are components of both the Dow Jones REIT index (underlying for the SRS double inverse) and the financials index (underlying for the FAZ 3x inverse).
I’m not selling my mREITs, and one of the long posts that is coming will explain why. I am hedging.