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).