Shifted HD hedges to XHB

Yesterday, my GTC order to buy to close +HDCZ (HD Mar 32.5 call option) for 0.05 hit. This was a covered call I sold on some HD stock I was assigned from previous put selling at the 32.5-37.5 levels. At 0.05, it was not a good hedge and wasn't earning me much time premium. Given that HD reported today, I figured I'd want to get the upside if there was any. There wasn't and the reason I was able to close the options yesterdays was because other people already knew that and the implied volatility had fallen. Either way, I am just following my risk management plan.

I have been wanting to short some XHB for a while now but they are hard to borrow. So yesterday, I tried to sell some XHB Mar 21 call options naked at the ask but that didn't work. And for the first time in a while, luck was on my side. Despite more nasty economic numbers, we get another 6.4% gain in XHB lead by gains in HOV and LEN. So I sold a few front month call options naked at the 22 strike for around 1.50. This should give me a short position at 23.50 which is a little below the 200 day moving average. I haven't done much shorting before so I am just playing around. I figured that with my housing heavy portfolio (CBG, HD, BBBY), having a bit of a hedge on XHB couldn't be that bad.

I also tried to sell some April 65 FWLT puts (idea stolen from here) for 3.90 but it didn't execute. I like going long after a big drop but I have learned from experience. Stocks that fall hard tend to fall slowly afterwards. Often, you'll get another chance at the current price some time later or at a better price. So, I wasn't too eager to buy on an up day. But I will try again tomorrow, if it keeps dropping. 61.10 is an ok breakeven price for FWLT but not the sort of value I am looking for. For example, it is not as good of a value as AEO at 15.

I am practicing market discipline right now and keeping buying power high while hedging any of my positions that hit near term highs. I want to get out of as much stock as I can while maintaining positive delta. If EMC keeps going up, I am going to sell calls on my stock and start closing the puts I recently put on.

EMC and VMW revisited

For those of you who are really hardcore, here's a paper that describes the sort of things that cause mispricing. To summarize, it's because VMW is/was hard to short. This supports my theory that once EMC can sell its shares of VMW, we are gonna see a price correction. Either EMC up or VMW down but probably VMW down.

Microsoft (MSFT) bids for Yahoo (YHOO), Short XHB?

I missed the boat. The 31 a share offer from Microsoft for Yahoo has pushed the price to the 29 level. I got a bit greedy with how much premium I was trying to sell the put options. I could have made instant bank but now I got nothing.

On another note, this rally makes me want to short the S&P Homebuilders ETF (XHB). The market seems to be on looking at the good news and ignoring the stream of consistently bad economic indicators. Even though the government is bailing everyone out, the homebuilders are pretty low on the list. I tried to short a small position (just to see what it's like since I've never actually shorted stocks before) but couldn't borrow any shares. So I guess I have to just sell calls on it.

I also got out of some DRI options. There's a good chance it is going back to 20. Casual dining is a tough business right now.