GSE bailout means interesting trading day

Financial stocks are going to be volatile on Monday following the Fannie (FNM) and Freddie (FRE) bailout. I am not whether this is good news or bad news but the S&P futures are up 3%+.

I don't think this changes anything so I am still going to be selling on strength in the financials. I am going sell some shallow in the money calls on positions like Wachovia (WB) or Bank of America (BAC) on the surge tomorrow. This is an opportunity to put on hedges at good valuations (despite implied volatility being low).

Closing Hedges on Wachovia (WB) and Bank of America (BAC)

Short selling restrictions lapsing on broker-dealers combined with options expiration week (lots of open interest with strikes below the current price) means that we are seeing downward pressure. It might be temporary or it might be another few weeks of financial doom and gloom.

Either way, this is a good time to take profits on any calls (naked or covered) on financials (WB, BAC, BCS). I am closing some August 17.5 and 20 WB calls and also closing some September 20 calls. The plan is either to write lower strike calls for more time premium or to wait for an uptick. Which happens depends on price action for the rest of the week.

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.