September 25, 2008

Global Market Comments for September 25, 2008

1) Those who work in the financial industry see the world ending on their screens, then walk outside and see people and cars on the street, shops doing business, the sun shining, and everything appearing normal. It's surreal. Many businesses and banks are months away from shutting down from the lack of operating cash and no one realizes it. It's like an atomic bomb has been dropped, but hasn't hit the ground yet. Even if the bail out package passes, home prices are still going down and we are still falling into a recession. 30 day T-bills were trading at 0.40% today, which means that banks are parking their money with the government instead of lending it.  Phone calls to congressmen from constituents were running 300:1 against the package. The Wall Street Bail out is a misnomer. The money is going to thousands of banks around the country, not Wall Street. And it is a restructuring more than a bail out.

2) August new home building permits in California plunged by 58% YOY, the largest fall since the Great Depression. San Joaquin County (Stockton) was the worst, down 65%. Solano County was best off, showing a 3.3% rise.

3) Weekly jobless claims skyrocked to 493,000, a seven year high.

TRADE RECOMMENDATION

Position your self for a post bail out rally. Sell 100 X October S&P mini 1100 puts for $13, taking in $650,000 in premium and use these proceeds to buy 100 X December 1300 calls at $18 for $900,000. The net cost of the entire position is $5, or $250,000. Run the October puts into expiration, keeping the entire premium, and sell the December calls on any rally. This is profitable on any rise in the market and any decline in implied volatilities from sky high levels in the mid thirties a rally would bring, while protecting your long volatility position from time decay with a long dated option. The technical term for this position is a 'short dated bull cylinder'.