GNW Nov$11 calls!

Discussion in 'Options' started by khovanskiian, Nov 7, 2010.

  1. Hi gentlemen,

    I just discovered this forum and feel very glad I found a place to talk about options.

    On Wed, Oct 27th, Genworth Financial (GNW) reported pathetic earnings. The stock dropped 4.7% on Oct 28th, closing at $12.58. No big deal.

    But what surprised me was that the next day, Fri, Oct 29th the stock opened at with a loss of 13.5% (for a whooping total decline of 17.5% just since Wed's close.) "That's just waaaay too much," I said.

    I did some research and it turned out that Steve Eisman, the great Steve Eiseman that shorted Bear Stearns and all those sub-prime mortage bond, CDOs, etc.. (book: The Big Short,) had about a 0.5% stake at this company in his hedge fund :p . He was present during the earnings release conference on Friday before the bell, and threw a fantastic spectacle threatening to wage a "proxy war" against the managers of the company to get them fired because of their abhorrently mediocre performance.

    So, of course, if Steve Eiseman says he's gonna cause trouble, every body fucking believes him. And the stock was down 13.5% at the opening.

    It traded well below $11.00 for the first hour. For a good time it was trading at around $10.80, even the $10.60s.

    "This is maniacal!!!" In the past, I had swing-traded this stock and knew some stuff about the company. I was thinking about buying the it but then I just did what my guts wanted me to do: Bought the Nov$11 calls @59¢. Not quite sure why, but I also bought the Nov$11 puts in equal numbers @57¢, effectively straddling the stock. I suppose I bought both out of complete uncertainty. With 20 days to expiration this was sheer bravado.

    I reflected for a while and realized 1 thing: People had reacted to *Steve Eisman's drama*. But ppl had forgotten in first place that it was also *Steve Eisman* who was LONG on this stock. In the books, the stock is definitely worth "way" more than $11, even $13. That was precisely the reason that Eisman was angry about!!! That's the bottom line.

    Keeping the calls made perfect sense. I sold the puts @18¢ on Tue, Nov 2nd. Now the stock is now at $12.43, and the calls are $1.43 ITM, and are worth a nice 242% of their original value of @57¢.

    I have never traded options so close to expiry. What's your recommendation? Should I take all my profits here? Must remind you that I sold the puts @18¢ and bought them @57¢. (well, I think that's why the call it "premium")

    Thanks and hope you enjoy my story...