-- Posted Friday, 22 May 2009 | Digg This Article
| | Source: GoldSeek.com
Rick’s Picks
Friday, May 22, 2009
“Phenomenally accurate forecasts”
We scratched a bearish position in the financial stocks yesterday, exiting some options we’d purchased in a vehicle that leverages the downside in the Russell Financial 1000. There were a few reasons why we decided to bail out for a slight profit, even though we’d held the position for just a couple of days. For one, the trading vehicle itself – the Financial Bear 3x, or FAZ, as it is known -- appears to be an unbeatable game, at least for the retail customer. Before this week, we had never offered a trading recommendation in FAZ even though it seemed to be popular among regulars in the Rick’s Picks chat room.
However, just a few days’ exposure to option premium risk convinced us that FAZ was conceived as a way for professional traders to fleece retail customers. Clearly, FAZ puts and calls are designed to be sold (i.e., shorted) rather than bought. That’s because premium decay is severe, and also because, due to the leveraging factor, slow, steady losses on the customer side are rarely recouped when the options spasm higher on their way to zero.
Weasels…
With this epiphany, we put out the following bulletin Thursday morning in the Touts section of Rick’s Picks: “Live and learn, as they say. This vehicle is a chat room favorite, but I hadn’t paid much attention to it myself until we established a small position the other day. And now I know: FAZ is an unwinnable carny game controlled by some of the sleaziest operators in the business. We know this because of the way the June 10 calls that we tried to short this morning behaved when financial stocks opened on a phony gap-down. Ordinarily, option market-makers would have used this situation to rape buyers of June 10 calls on the opening by filling buy-at-the-market orders at the highest price possible.
“ Instead, there evidently being no market orders or even any enthusiastic bids, the weasels fell over each other lowballing the offer, selling the calls in front of us at a price we could not match. The result is that the calls opened at 0.22 — not only far less than the 0.30 we had sought, but at a between-markets price that was out-of-bounds for retail customers. (The public can trade only in nickel increments except on spread orders.) Considering the foregoing, my recommendation is to scratch the October 10 calls on the current 1.20 bid. Note: I offered them for 1.25 myself, going between the 1.20/1.30 market reflected at the time, and was filled within five minutes.”
Dollar About to Turn?
There were other reasons we closed out the bearish position, including our expectation of a bullish turn soon in the dollar that could further strengthen financial stocks and put pressure on bullion. Our short-term outlook had called for the Dollar Index (DXY) to fall from above 84 to exactly 80.05, a “Hidden Pivot” target. The target was nearly achieved yesterday when heavy selling brought DXY down 80.37, the lowest price since Christmas.
Another reason we elected to cut and run is that our key bellwether for the financial sector, Goldman Sachs, looks like it is fixing to further terrorize shorts. The stock was much stronger than the market as a whole yesterday, up as much as $3 intraday when the Industrial Average was off by more than a hundred points. Moreover, Goldman has been exhibiting other bullish signs that we wrote about in an analysis sent out to subscribers Wednesday night: “The stock’s last thrust contained the kind of hidden power that creates buying opportunities. Specifically, the high at 144.86 exceeded two prior peaks — including an ‘external’ at 142.00 from early October – but without getting past a more obvious September 19 high at 144.98…”
Bottom line, even though we see the powerful rally of Goldman Sachs and other financial stocks as the Mother of All Bear Traps, that shouldn’t stop us from trying to profit from the hoax while it lasts.
***
Rick's Picks publishes a daily trading newsletter for gold, stock, commodity, and mini-index traders 240 times per year. Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers' initials will be used unless express written permission has been granted to the contrary. All Contents © 2009, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Friday, 22 May 2009 | Digg This Article | Source: GoldSeek.com
