Tuesday, September 26, 2006

So what happened..........

Well - I have entered two orders at this point for the fall shorts. They are both limit orders and ideally they will be executed by the end of this week.

First Position:

Long 50 PUTS on Washington Mutual with $40 strike price and October 20, 2006 expiration - limit order for $.05 so - if executed it will be a $250 position with about 100+ times leverage but expiring in less than a month. This is on the bet that massive drawdown in market will occur in next three weeks.

Second Position:

Long 10 PUTS on JP Morgan with $45 strike price and January 2007 expiration - limit order for $1.00. This is about 40X leverage with expectation of JPM gettin drawdown to low 30s this fall for a 1000-1500% return.

Well see......

Best regards,

BG

Friday, September 15, 2006

Important Developments

I am the biggest idiot ever...... After SLW rallied to new highs last week I failed to unload the whole position. Instead I watched it sink back to $8.84 from the $12.20 high. I only managed to sell 10 of my 45 contracts - at an average cost of $1.85 - barely recovering my initial investment. The additional $7,500 of profit was squandered!

After the mistake in GNTA that leaves me with an all new LOW in equity to start the fall shorting - only $1,200....approximately. This is pretty bad. I have not given up yet - but the rest of this post will address some important changes in my assumptions for this fall.

I think the implosion of the commodities sector - mainly oil and metals is signalling slowing economic growth - not an increase in supply - but instead a decrease in demand. This should bolster the expectations of a market decline in the intermediate term - but in the short term I think the possibility of the market hitting new relative highs is a definite possibility.

As a result I think that we have to watch the fed meeting and the subsequent reaction closely. We also need to carefully consider whether the correct shorting point is late September with January 2007 timeframe or instead later 2006 start point with mid-2007 timeframe. Things will become clearer in the coming weeks. Until then - waiting patiently for now.

Best regards,

BG

Sunday, September 10, 2006

A *short* case study - WAMU (symbol: WM - NYSE)

I thought I'd take 15 minutes on this beautiful Sunday to share some thoughts on one of the potential shorts for this fall - Washington Mutual we'll look at the technical damage first which I consider first followed by some interesting fundamental analysis and statistics from the 10-Q and 10-K.

Technical:

First we want to examine the potential execution zone for the trade - that is where would we want to initiate the PUTS positions. I think the convergence area of the 50 day and 200 day moving averages is a highly probable rally point where the stock could bounce down off of a more clearly defined resistance area in the $44 area.

Our next question is what the potential settling prices for this stock would be out 4-5 months. I am looking for retracements in the 20%, 35%, and 45% areas. The potential leverage of this position could exceed as much as 70 times the equity so you can anticipate that the risk reward is high - probably in the area of 1 to 70 if the correct cost basis is attained. What does this imply? These options are being priced based on the past 6 years historical volatility levels and not on the foundation of a probable market downturn in the 20-30% range over the coming 4-5 months as I expect. I also expect the forthcoming developments to shake our finance based economy to its very core.

I expect major home lenders such as Washington Mutual (probably the biggest lender in America) - and at a minimum the largest residential portfolio lender to rediscover both default and credit risk in loans that it considered highly credit worthy based on traditional metrics such as FICO scores.




Now let's anaylze the profit potential of these various plays trading the January 2007 $40 PUT options. I am looking for entry cost around $0.50 a contract which I don't believe will be obtainable until the stock retests the resistance level at the moving averages convergence area around $44.

The following would be the profit potentials at each zone based on current options pricing ($1.35) as well as the desired execution zone of $0.50.

$36 target area:
Current pricing profit potential - $4-$1.35= $2.65 profit / $1.35 cost= 96 % profit potential Execution zone pricing profit potential - $4-$0.50 = $3.50 profit / $0.50 cost = 600% potential profit

$30 target area:
Current pricing profit potential - $10-$1.35= $8.65 profit / $1.35 cost = 540% profit potential Execution zone pricing profit potential - $10-$0.50 = $9.50 profit / $0.50 cost = 1800% potential profit

$24 target area:

Current pricing profit potential - $16-$1.35= $14.65 profit / $1.35 cost = 985 % profit potential Execution zone pricing profit potential - $16-$0.50 = $15.50 profit / $0.50 cost = 3000% potential profit

As noted above there are some great potential trades here and their potential will depend heavily on the entry costs. In fact - before reviewing the actual nuts and bolts of the potential profits I was unaware of the high risk/reward of these setups.

Fundamental:

I am a little tired after all of that and need a nap. :0) - I will shoot for the fundamental analysis later this evening or this week.

Best regards,

BG

Wednesday, September 06, 2006

Back?

Well - I have finally found the desire but not necessarily the time to post. I will do my best as I believe that documenting my shorting activities in the market this fall will prove extremely important and prescient.

The portfolio has rattled around quite a bit this summer with a drawdown all the way to $1,200! Right now we are hovering around the $7,500 level of equity with a peak of $9,900 yesterday and an expected ending point around $12,500 in about 2 weeks if all goes well. I figure worst case we are looking at around $3K.

$5K would be enough for this fall's shorting but $3K could prove quite tight. $12,500 will present several opportunities that would not otherwise be available. So what am I sitting on now - WZEN and GNTA CALLS are not really even worth the mention as if negative values were possible they would both be negative right now. SLW is another story and I still have 35 contracts left after dumping around 10 of them during the last week for an average price of around $1.80. That recovers my initial investment and puts it at a 300%+ return. I am looking for returns on the remaining ones in the 500% level so that shows how much I am going for it - or maybe how stupid I am.

Anyways what is the short portfolio looking like for this fall?

50% shorts in WM
and 50% shorts rotating between XLF and SPY in different maturities and timeframes. XLF probably first then flowing any funds back into SPY.

After liquidating the metals I doubt I will be long again until this coming spring as I believe we are about to enter a debt liquidation deflationary cycle the likes of which this generation has never seen or even imagined. This will result in metal prices falling and although the relative performance will be better than other real assets including property - I still don't like negative returns.

Assuming a 10K starting amount I think we can set a reasonable target of 100%-200% return on equity in the shorting options although the results could be much better or worse. You will see it here first when I initiate the positions and I expect a start date around the 20th of this month of September.

Here is the portfolio snapshot for what it is worth:

I also am going to take the opportunity to welcome some new readers to the blog - mainly another Cal Bears Alum. It is nice to see my former classmates and more importantly my friends having so much fun and kicking so much ass out there in the business world.

Anyways enough reminiscing - what do you need to do the shorts? You will be long PUTS so you need at least 2.5K and an options Level 2 enabled trading account. I will pick the securities and we will all see the results. Its an exciting time and if all goes according to plan I will be back next spring to get majorly long AIG to the tune of 100+ contracts hopefully for the 2009 CALLS. Quite honestly I thought this blog was done forever a month ago along with my trading account. For better or worse I was given another opportunity and I plan on making it worth everyone's while.

Now, a moment of silence for those holders of GNTA who lost their shirts and maybe more this afternoon. I bought $500 worth of calls but I guarantee that there are those who lost more. I knew it was a speculation and expected to lose every penny but sometimes you just do things on pure principle alone.

Finally - get pumped - we are going into a world of speculation / investment that few have tried and even fewer have succeeded at. Only the greats - Soros, Robertson, O'Neill, etc. - have ever successfully developed a shorting program although they each had their own approach. I like Soros boom/bust cycle and inter-industry analysis the best and that is the model that we will be using - mainly focused on this property cycle taking its last few breaths.

Please shoot any questions / comments to bengreen@gmail.com - lets do this together and do it right.

Best regards,

BG