Wachovia (WB) surprises, but not in the way you think

Wachovia (WB) reported Q1 2008 today with a loss instead of the profit expected by analyst consensus. Dividend was cut to $1.50 per year. Neither of those things were surprising. In fact, I would argue that it was mostly priced into the options premiums.

The surprise was that they pushed up earnings from Friday to Monday. This hasn't happened to in recent memory and as a result, I was caught with some positions that I wanted to close / roll down. But overall, it was a cheap lesson. A few hundred dollars for a lesson that there are temporal surprises.

Still long Wachovia (WB) through a variety of naked puts. I am trying to figure out how exactly to position myself going forward. The pricing of new common stock at $24 is reassuring since that sets a near term bottom (the new issuance was oversubscribed).

I have been building reserves (not unlike banks) so that even with a 10% drop in a core holding no longer threaten margin calls. I have been deleveraging by reducing the number of share I hold. For example, suppose I have 200 shares of BBBY get called away at 30. I would normally write 2 naked puts at 30 for the next month. Recently, I would instead write 1 contract. This is a natural deleveraging that does not force me to realize losses unnecessarily. Also, I have been closing winning positions that no longer have sufficient reward for the margin required.

General Electric (GE) gets hit by an earnings miss

From GE investor relation: GE announced first quarter 2008 earnings from continuing operations of $4.4 billion with $.44 per share, down 8% from first quarter 2007.

As they say, "the market has a paddle big enough to give anyone a spanking". Nothing could be more fitting when the second largest company in the world by market capitalization (eclipsed by XOM due to the recent rise in crude). GE is down a whopping 14.66% or 4.70 to 32.05.

Not long ago, Jeff Immelt all but promised 15% growth this year. GE hasn't missed a quarter in years and even when it did in 2003, the miss was a penny. A 7 cent miss is huge for GE.

This is another example of the long tail of equity pricing. Stock prices do not follow a normal distribution; they have long tails. This is also known as Taleb's Black swan theory. Every options trader should be very comfortable with the idea that substantial moves happen more often than predicted by models. Such rare events is what makes naked options more dangerous than the statistics would predict.



Now back to GE. Industrials were strong due to currency and rest of world demand. Appliances down due to housing crisis. Financials down due to mark downs. Healthcare down due to lower demand for capital diagnostic equipment. None of this is surprising, per se. I don't know why analysts didn't bring down estimates.

I was slightly long GE before this (long the stock, selling calls against). I see this as an opportunity for me to pick up for shares for a great price, 15x trough earnings. I am selling at the money puts for June and September. The options markets are not increasing the implied volatility. This is bad since it means I get less time premium. This is good because it says that options traders are optimistic. Either way, I am reserving extra capital to handle a dip (since I am at the money) and in case of a volatility spike (since IV is low).