Beware of Cramerica - Wachovia (WB) price action

Just thought this was interesting... Jim Cramer said all banks are a sell yesterday. In after hours Wachovia (WB) trades down 3%.

Today we get a massive rally that pushes WB up 10%.

If you listened and blindly followed Cramer, you are out 13%. And if you listen to others it is hard to get the conviction that lets you stand firm. I bet a bunch of those selling after hours are back in at these prices.

Beware of bad quotes on TD Ameritrade and Prophet

Hope everyone had a good trading day.

I don't know if it was because of the volume but after the fed today, Prophet charts were very spotty. I also noticed that options bid/ask on Ameritrade was broken. Trade execution worked flawlessly and I got a couple trades done (mostly rolling out calls). Keep an eye on it and be careful. Yet another reason why you should always use limit orders.

For example, AEO May 17.5 Puts were being quoted on Ameritrade as 0.75/0.75 or 0.75/0.85 but the actual quote was 0.65/0.75.

I am going to try to avoid the market the next two days due to the quadruple expiration.

JP Morgan (JPM) buys Bear Sterns (BSC) and Fed cuts rates

As many people guessed, JP Morgan (JPM) is buying Bear Sterns (BSC) with guarantees from the Federal Reserve. (For once, CNBC was right.) The Fed also cuts 25 basis points.

I am really worried now. For one thing, the price for the JPM takeover of BSC is $2. Does that mean the shares are going to open at $2? Why were there so many dumb people in it at $30-35? I mean, even CNBC kept saying that equity was wiped out. If BSC was so mispriced, are other banks also mispriced? I guess we'll find out when the market opens.

Why cut rates when there is a FOMC meeting on Tuesday? Doesn't that signal the Fed is panicking?

I have a feeling that Monday is going to gap down on heavy volume (don't have any theories, just a feeling). The news doesn't make me feel confident.

Short Idea: True Religion Apparel (TRLG)

I was listening to the American Eagle Outfitters (AEO) conference call and noticed that women's bottoms (denim in particular) was weak and that AEO is revamping the entire jean line for the back to school season.

So this gave the idea that True Religion Apparel (TRG) would be an interesting short. They make high end jeans. High end is bad when consumers are trading down. Jeans are bad (apparently, due to some fashion cycle which I don't understand). TRLG is currently trading 17x earnings while AEO and many other apparel retailers are trading around 10x earnings.

This is the first of many such quick pitches I plan to do to give my readers ideas for their watchlist (which I am always in need of). I haven't done any due diligence but I am definitely watching TRLG. I am thinking of either shorting it or doing a long/short pair with AEO to reduce sector risk.

I don't like much about Jim Cramer but I do like the fact that he knows a little about a lot of stocks. Someday I hope to copy that trait.

Covered calls, straddles, and strangles as hedges

As they say, the trend is your friend. S&P 500 is failing to breakthrough 13 day exponential moving average (EMA). I am taking this opportunity to fade the rally by adding hedges to my positions.

Most of the losses I have been suffering in this downturn have been to long positions I am holding. So today, I sold a bunch of calls slightly out of the money (OTM) 2-3 months out on many of my positions (i.e. covered calls). In addition, I am trying something new and selling call options naked against in the money puts, essentially turning them into short straddles or short strangles. I also sold some calls about support on my mess of Wachovia (WB) puts that gives me a weird P/L curve. It is basically a weird ratioed straddle with different months on the different legs. The P/L curve shifts right and up over time. The up shift is due to time decay (i.e. positive theta) and shift right is because my positive delta positions are longer duration than the negative delta positions. That is, the puts I sold are farther out than the calls I am selling.

In addition, I also sold some Washington Mutual (WM) short to hedge against my WB position. I don't usually short stock so this is somewhat of a toy position to gain experience.

This liquidity injection is a bailout.

A 200 billion dollar liquidity injection was announced today. The Fed and other central banks are essentially willing to lend on mortgage backed securities (MBS). This includes agency backed (the stuff Annaly / NLY, holds) and AAA private label (the stuff Thornburg / TMA, holds). While NLY, TMA, and the like cannot directly borrow from the window, companies like Bear Sterns (BSC) can.

This is the capitalist version of nationalizing MBS. The Fed is essentially willing to be a buyer of last resort for these securities for a discount.

The market reacted with an incredibly strong rally. I am guessing it is a combination of short covering, bouncing of January support, and this bailout.

Leverage works both ways and this 3-4% across the board gain is a gift. While I believe the rally has legs, I took the opportunity to unload a bunch of positions into the rally. I need to de-leverage my portfolio and I am not going to give up such a chance. I closed my front month Mar 33.50 ADSK puts, Apr 33 GE puts, and Apr 35 WAG puts. Nothing wrong with those companies per se. Closed ADSK and WAG for the margin. Closed GE because it broke its long term 33 support and there might be a chance to grab it lower.

Given that there is P/E compression across the board, I am revising the price at which I am willing to take assignment of stock lower. So as a risk management move, I am closing many puts that have too little reward for the risk taken. Fading the rally, so to speak.

The 14% gain in Wachovia (WB) was great since that is the stock that is causing me margin calls. My strategy right now is to recover margin and stay in the game until March options expiration. Then I am going to sell some calls against the WB that I will likely be assigned.

Perplexed by partial fills

I am learning new things about the markets every day that I am trading options. One of these new things that continue to surprise me is partial fills. If your trades are small compared to the liquidity of a stock, you rarely see this. For example, if you trade 500 shares of GE, it is usually always executed in a single fill. However, if you trade 500 shares of a company like USEC (USU), then you might get fills of 100 shares at a time (especially if you use a limit order). This, I understand.

What I don't get is why sometimes people are just out to get you. Take a look at the following trade result. That's right, I got filled 4 shares of a 3.49 stock. Someone paid a commission to sell 13.96 worth of shares. I don't think it is a part of a larger order because I was sitting on that limit order for a while. Notice the round lot fills around it.

Is it just a mistake or is it a glimpse into the sort of people that trade micro cap issues? Did they want to bail out and get a couple dollars from their position? Either way, it sucked for me since it took a really long time for the last 96 shares to be filled and I saw lots of round lots fly by. In the end, someone else got filled 96 and then is looking to sell 4 shares and the annoyance gets passed around.

Glad I avoided Thornburg Mortgage disaster (TMA)

After its recent margin call woes, I was thinking of going long Thornburg Mortgage (TMA). In particular, I was looking to buy the F series preferred and hedge by an artificial short of the underlying. The Thornburg preferred (TMA-F) is cumulative and convertible to 2.2 common shares.

Today, I watched TMA and TMA-F carefully and almost wanted to chase the stock. I avoided doing so only because of the Ambac offering. I didn't want to get caught in any market volatility.

I am glad I didn't take any position on TMA despite the numerous calls of 'value' and bounce heard around the web.

Today, after hours, news of TMA's failure to meet margin calls of 20 million was released. Apparently JP Morgan is tired of extending the margin deadline and is serious about seizing assets. TMA is down 1.40 to 2.00 in incredibly heavy trading.

20 million seems small to me and the fact that no one wants to give TMA 20 million is a bad sign of the tightness of credit markets. It might just be a raid to grab some marked down assets on the cheap. Leverage + market failure = losses.

I am slightly concerned about the continued downtrend in WB. I am watching the resistance at 28. Maybe the market knows something I don't but as far as I know, the dividend seems reasonably well covered. I am not going to sell my positions but I am preparing to clean up other positions to make sure I don't get margin calls like TMA. I am going to be ready to take assignments as my naked puts at various strikes become in the money.

It's rough out there but there is plenty of opportunity. Defense is the best offense even if you are a perpetual long.

USEC (USU), an interesting Uranium / nuclear energy play

With oil hitting new records, everyone is looking towards other energy sources. Natural gas is no help, that's expensive too. In fact, the reason we have so many natural gas power plants is because we thought it would stay cheap. For an example of how difficult it is to predict natural gas prices, look up the Amaranth Advisors disaster. Coal, solar, and nuclear plays are all being bit to new highs.

I think most of this is irrational. Energy prices are high due to a speculative bubble and market manipulation (by OPEC and others). Stocks in those sectors are also incredibly expensive. Take Exelon Corporation (EXC), a nuclear plant operator. It is in a great position because no nuclear plants are being constructed. However, I do not like owning any utility at a P/E of 20. That's just silly.

While doing some research on nuclear energy, I did find an interesting little company called USEC (USU). It is the owner of the United States Enrichment Corporation. USEC (USU) was privatized over a decade ago. It currently operates a gas diffusion enrichment plant which is barely breaking even. (Enrichment is a part of the process that creates fuel for nuclear power plants). It also performs some contracting services for the United States Government.

A company with only one operation that's barely breaking even -- that doesn't sound very good at any price. However, the story behind the stock is that it is building a new gas centrifuge enrichment plant. It is expected to use 95% less energy than the current plant (rising energy prices is why the current one is barely breaking even).

So, why is the stock in the dumps? Well, the project is 50% over budget and likely to be behind schedule. There are lots of other companies doing the same thing. In this credit environment, a small player like USEC (USU) may not be able to get funding to finish this plant.

So, why buy the stock? Well, recently President Bush passed a series of bills that includes loan guarantees for nuclear companies. USEC (USU) is likely to qualify. Its competitors face difficulty in placing their new plant due to NIMBY (not in my back yard). USEC (USU) has two properties on lease from the DOE for this purpose.

With the current price, there is a lot of upside for moderate downside. I've been picking it up since the 6.50 level and will continue to accumulate. I am also looking at selling some puts at the 5.00 strike.

Lots of risk, but if you believe in the nuclear renaissance, USEC (USU) is definitely a ticker for the watch list.

Opportunity in Wachovia (WB) in market whipsaw?

On Friday, the markets was just plain ugly. A look at the advancers vs. decliners for all the major averages will tell you that almost everything was down.

In particular, I am options with intrinsic leverage on underlying securities with a high beta in sectors leading the market decline (consumer discretionary). So, my leverage vs. the market on a down day like this is somewhere between 3x and 4x. That's a 10% drop in one day.

I went through a did a through check of all my portfolio positions and I think I will be ok if I can make it through possible margin calls. I have a couple of positions (ADSK, NVDA, EMC) that were written at the money for the front month and are now in the money and at risk for assignment. I have enough cash and margin to take the assignment. I am more concerned about the overall margin. Since TD Ameritrade does not use portfolio margin, margin is often a concern for my style (which has high drawdowns). We'll see what happens next week. I might have to close some of my longer term puts (which are currently making money) for some buying power.

I spent most of Friday listening to conference calls (there's no reason to listen to CNBC on a day like that; it just makes you more emotional) but I did manage a few trades. With a review of the last Wachovia (WB) quarter, I am still convinced that they will be fine in the long run. I am not saying this is a bottom. I fully expect more writedowns. In the conference call, WB management gave the impression that they are properly reserved for a 60 basis point loss (triple their normal rate) on their Pick-a-Pay (what WB calls Option ARM) loan portfolio. However, looking at recent data and the 'vintage' charts, there is a good chance that losses will soon be estimated at 80 bps or higher. In addition, the auto portfolio looks pretty bad too but that's reasonably small. There is also the risk of canceling the dividend. They don't need to right now but it is an easy source of additional capital. Either of those things might pressure the shares. However, I think the risks are priced in for long term buyers. So I sold a bunch of WB naked puts for multiple months out and at various strikes. This should more than double my WB delta.

I also closed out my XHB naked calls. I am not going to be greedy so I took the 60% gain in two days.

We'll see what happens Monday. If we get additional downside, I am going get more defensive and close out everything that I don't need for additional buying power and then start adding more delta to all my conviction buys (to steal a Goldman Sachs term).