I wish I had done as well as the index. MBI I lost money having to cover in one of the massive squeezes(that are always 100% guaranteed free money chances)Still holding the puts WB I broke even covering in the fnm fre bailout day, WM I lost covering in the same day Thankfully my largest bet was against the gses and I kept adding even when the price got extremely low. that more than made up the others and gave me a nice profit(I also had bought SKF earlier in the year and short other stuff). But after LEH failure my bread and butter became fed futures, it was what made the majority of the gains in the year and I'm still pressing there because I think the rate will be 0.5% or lower for perhaps the entire 2010, my crystal ball doesnt go that far so I'm sticking with 09 contracts But the biggests lesson for me this year has been that everytime I tried to 'trade around' my position or time the market, it was a disaster. I fought the 'last war' thinking a VIX of 35 would lead to huge bounce everytime. All my 'interventions' to protect from declines in fed funds futures, didnt work. Same thing on the 'cover and short more latter' Now I changed the strategy, everybody and their mothers are calling for the hule rally that lasts, I'm just going to ignore all that. added to fed futures and shorted some WFC(avg in). Will buy puts there too. I will deal with some of the 'surge of bullishness' problem by adding bullish positions when panic hits and running some kind of double book, I was thinking of shorting 30y swaps against 30y treasuries, but the 30y swaps futures dont trade. We will see if the 10y gets out of line. Perhaps your 1) using XLF or ES calls. But I'm going try to focus in buying puts more often
In this kind of enviroment I'm not sure the best market timers can figure out what going to happen. The guy from Quantifiable Edges blog was having his historical sp500 methods fail even before LEH BK. the declines became more persistant, there was hopelessness out there. after the failure then it all became out of whack. His CBI indicator fluctuates from 1 to 10, at 10 SP500 is supposed to be a buy. somehow during the panic it hit 40+
I agree with ammo, another way of taking a bearish view is to sell calls. Particularly a good idea for the later stages of a decline, where options vol is higher (eg WM in the days before its failure, GM in December 2008). A big concern of mine is the rarely discussed change in "bailout policy". FRE and FNM in September was a massive home run for me. When C went to the low 3s a couple of Fridays ago, I (and many others) assumed that a bailout of some sort was near. But given the recent AIG and TARP experience, I was too scared to short / buy puts / sell calls. That hunch proved to be correct, given the generous terms made available. Like CDNtrader, I am also watching some of these insurers. I haven't done a lot of research, but I think it's reasonable to conclude that some of them are in huge pain as a result of the drop in T bond yields. AET AFL AIG ALL AOC CB CI CNO GNW HIG LNC MET MMC PFG PL PRU SLF TMK
Great thread everybody. Has COF been mentioned at all? I shorted this near the close yesterday at $29.20. The reasons should be obvious.
I think selling calls is a terrible idea. Short premium is a bet against movement - whereas you are betting on a huge bear market, an environment that historically has *insane* levels of movement. Implied vol might be high, but actual vol going forward is probably going to be even higher in most of these situations. Not only that, but when the sharp counter-trend rallies come along, you can't go short any more because you are already short the calls. So there's a huge opportunity cost. You are taking a situation where you have 90%+ confidence the stock will be down 80%+ within 12-18 months, and trying to capture modest premium with reward less than your risk. It makes no real sense, especially when you consider that long premium (puts) can make 5-10 times your money, even if your timing is poor. Just look at the scenarios: if the stock is going to make a huge rally, being short calls is suicidal. If the stock is going to make a huge collapse, being short calls is suboptimal to say the least.
I agree - if I look at my opinions from 1 year or 6 months ago, many have been home runs, but I have not made as much as I should from those 100% correct market views. The main culprit has been trying to trade around the positions - the sole exceptions were using short-dated calls during panics to hedge the violent upside potential, that worked very well. So, is the lesson that as long as the market does not do something to comprehensively disprove your view, and the facts and long-term trend still support it, that you should just stick it out? Or, a refinement on that approach - that you should stick it out, but during panics/blowoffs in your favour, use some short-dated options to hedge the risk of a major bounce back? A 100% bear position on these stocks from 1 year ago (which is roughly when I first started buying puts on CFC, CORS etc), which was hedged on occasion with short-dated calls whenever panic selling arose, would have done amazingly well, AND would have been much easier to hold during the bear market rallies (due to the calls offsetting most of your loss). Also, by only hedging with calls, if you are wrong and the market keeps tanking, you retain all the upside in return for small premium payments. A further benefit is that if you are right initially (i.e. the market does rebound fast), but then wrong (i.e. it turns around and tanks before you expected it to), then you still keep your position - you lose the call premium but not the shorts/puts. Given that the main problems with these bear bets are getting faked out by sharp post-panic sucker rallies, covering too soon, and failing to re-short even if you did spot the bounce accurately, then a "short & hold" (or long puts & hold) with tactical call purchases during mini-panics seems to be best. I think it's definitely worth trying this approach. In fact I might just split some capital into three tranches, and try i) pure short & hold ii) buy puts & hold iii) buy puts, go short, and hedge tactically with calls. Then see what the results are like. Any thoughts?
Maybe we run our portfolios differently. I'm currently using the druckenmiller/soros method of picking up nickels waiting for dollar bills. Of my initial short list most of the shorts were nickel trades where I was just trying to pickup free money. 'success' there meant the trade would increase my networth by 1-2%. WFC is a nickel trade also. I'm aiming at 1-10% networth total returns in the sum of the nickels FRE and FNM I gunned for much more because my confidence was higher, it was a dollar bill type trade. I aim at getting from 10% to 40-50% with sum of these trades(Dont feel that I got enough experience to go for soros 100%+ years). After I had success there I felt more confident in risking the gains of the year and more by averaging down at fed futures, after that worked I felt that I could go to the more deferred in 09 and increase the size also. So I'm natural inclination after finding out that my short term timing is failing is to decrease the short size and take the pain. I'm also buying stocks that I think are too undervalued and bought C bonds as well, this should decrease the volatility of the nickel portfolio. On the dollar bill trades its hard to hedge because my confidence on the hedge leg will be so low I will close as soon as it starts to lose money I'm not sure I will buy calls because the evidence is showing I cant time the market, so I will be probably a net loser there. Using puts should help The long commodities trade will probably be a dollar trade at some point, I'm actually even worried I will leverage myself too much there because the confidence is high
Added another part to the WFC short yesterday. Bringing my avg to something like $27.5 Mr Mortgage is saying they were big in Jumbo Prime that left people buying overvalued homes and with 50% debt service to income ratios. They are all in or getting into negative equity while unemployment is soaring. They also got the WB book which they could have easly assumed too optimistic losses(they assumed $32b on the $122b payoption arm, who knows it could be way more than that) I think these guys go to $20 at minimum
Added one more part for WFC short yesterday. Jamie dimon comments put the position in the black. I'm considering buying SRS, proshares ultra short real estate, it might have one nice pop left on this thing as REITS struggle to refinance