Short Covering and Option Expirations

After two days straight of down trading (three for the S&P), markets ended in the green today, having the Dow close up 46 points. The small rally comes with no surprise as some short covering was sure to be happening after two rather strong days of selling. Yesterday, I had a strong debate with myself whether or not to take some profits off the table in case of some short covering. Looking back, I probably should have, but hopefully I'll catch the next bus. I don't expect any huge buying volume anytime soon, and I still am enjoying 20-30% profits from my entry point. So, I would like to see the week end in the red, but in this market, you never know.

It is still looking like GM will be forced to enter into bankruptcy, and is looking to do so in the same manner that Chrysler did so. The company has a June 1st deadline to be able to get their debts in order, which would take a miracle if they were able to do so. Even though many are now expecting the bankruptcy, I don't think the consequences have fully been factored into the market. We saw what kind of influence the Chrysler bankruptcy had on the initial jobless claims report today, which came in worse than expected at 637,000. GM is a much larger company and as a result, should impact the overall economy much more significantly. Remember, it doesn't just effect employment. Think of all the dealerships that will be closed that they will be able to get out of their lease through bankruptcy. This should kill thousands of landlords around the world. Yet another bullet heading straight for commercial real estate. In today's premium podcast (subscribe here), I really outline some serious problems heading towards commercial real estate and why I am bullish in SRS and other funds.

PPI came in right in line with expectations. Like I said yesterday, such data does not necessarily suggest that deflation is no longer an issue. There are several indicators which measure deflation, one of which is CPI which is announced tomorrow. Look for CPI to set the mood for investing tomorrow. I would expect to not see much of a variance from last month's number, but we may be surprised.

More and more problems are creeping to the surface. One big problem about this economic crisis is that it is a global economic crisis. We are in uncharted territory in experiencing a massive, global recession in which almost all major economies are suffering severely. As a result, all governments are engaging in their own stimulus plans and is closing doors to a lot of imports, as they hope to keep manufacturing businesses within their country's borders. This is a plague for countries like China, Mexico, and Brazil, whose economies rely so strongly on major markets. Instead of looking to other nations to help stimulate our own economy, we and many other nations are forced to keep printing money and go more and more into debt.

Despite the rebound in financials, there still remains much concern for the future of banks. There has been so much focus on many of the "big banks", that many have thrown aside the thousands of regional banks that exist across the nation. These are the bread and butter of the financial systems. Even though their debt may seem insignificant compared to that of big banks, as a whole, they act as much of the equity providers for local real estate markets. Many of these banks will not find a TARP fund or bailout plan for them and will most likely have to go under. It is important to consider this when investing in financials.

I went in and bought some SRS call options for June today, as I wanted to take advantage of the down day. REITs received a lot of love today, who knows why, which I was kind of happy to see, considering that I had not positioned myself in SRS for quite some time now. I am hoping for a strong week from SRS this next week, as clearly commercial real estate is more and more coming into the spotlight.

Tomorrow I will be looking for the CPI numbers as well as the earnings data to set the tone. If we see yet another up day in stocks, I will most likely go in and buy up some more short as I feel that we are at the crest of the rally. I still see some great opportunity on the short side in the near term and look forward to some strong profits in my account. Happy Trading.


  1. Nash Says:

    Hi FF,

    1) Are you worried about your PRU shorts? It was just announced that they, along with other insurers, received a bailout from govt.

    2) VIX got hit hard today - do you think we should expect this to skyrocket in the near future?

    3) Much of today's rally was based on the fact the LIBOR dropped the most in several months, hence people are believing lending is really flowing again between banks. Do you believe in this thought?

    I am in SRS and FAZ with you as I said last week, and am holding on to the gains. Looking forward to ride this up higher. Keep up the good posts. Thanks.

  2. Lin Lin Says:

    FF... Can you explain the sudden upburst in LVS today? I was short most of this week, the heavy selling diddn't give me a reason to cover as it seemed so bearish. Then today it creeped up 14%!!!

  3. neal Says:

    FF... Any thoughts on going long on US treasuries?

  4. mike Says:

    Is this here Dr. Phil"s corner? LOL

  5. Finance Fanatic Says:

    Nash.. My PRU options are October expiring. Although the bailout may bring them some short term positives, they're stake in commercial real estate should come back to haunt them.

    Lin Lin
    As For LVS, their call volume skied, which signaled to a lot of short covering on the stock. After a huge drop like the one we recently saw for LVS, a bounce is usually expected. However, a couple more days of buying with LVS and I'm back on the short side.

    Dinadar, the only treasuries I have considered are short term, however, the yields are pretty pathetic at this point.

  6. Lin Lin Says:

    Eh? You never said you were already shorting LVS... Did you cover after today?

    You said you were "looking to" short it... lol I know how you don't like to jump the gun on these rallies.

  7. Finance Fanatic Says:

    Lin, I did not get in the short on this round for LVS.. I did the last round and it paid out nicely. I was considering shorting it this morning, when it was up another 10%, but it came down too quickly for me to get in! I'll catch them on the next bubble.

  8. Lin Lin Says:

    Sadly I got in this morning at 9.95... Considering the high was 10.55 this isn't too bad of an entry.

    Yes last round paid out nicely. I only caught one day and cashed 17%. You know you should recommend MGM too. I know they are in better shape then LVS but look at their price action. They dropped way more then LVS and there was no spike from them yesterday. Only high volume. When's a time you like to take profits FF? If you don't mind me asking. I usually don't push my luck any farer after 20%... Other traders I know wait for a buy/sell signal, which can wipe out or give them unlimited profits.

  9. Anonymous Says:

    With the decay in 2x ETFs why would you buy calls in SRS? I bought a load of $3 June put options in URE instead.


  10. Finance Fanatic Says:

    I usually would but puts on the inverse, however, URE is getting so low, there is such a big percentage difference in the strike price. New real estate etfs coming out, I will be definitely shorting the long

  11. ___ Says:

    The market rallies before every holiday weekend

    Best time to get short will be after Memorial day

  12. Peter Says:

    Guys, worst in stock market might be over. When will you accept it? We are about to break the recent highs.