Skip to main content

Morning Update

Yesterday shares of Morgan Stanley closed down 6.6%, leading the broader market down as fears of a hung Italian parliament looked like an increasingly likely scenario. Morgan Stanley was one of the hardest hit stocks in the S&P 500 because of its exposure to European peripheral bonds. The stock saw extremely high option volume yesterday, with 9.5 puts trading for every call. One of the biggest trades of the day was the purchase of 20,700 Oct. 23 puts and sale of an equal number of Oct.18 puts. The trader paid a net debit of $1.79 for this put spread, which was put on when the stock was trading 22.75.

Time has shown that when the market is spooked over Europe, Morgan Stanley is one of the first stocks to be sold. This is because the company is seen as the weakest of the “too big to fail” banks. Last year the bank made a lot of progress and posted earnings of $1.59 a shares versus a net loss in 2011. Revenues also increased to $30.514 billion in 2012 from $28.555 billion in 2011. But traders yesterday sold the stock and made bearish bets on the stock because Morgan Stanley has $6.3 billion of total exposure to European peripherals, with Italy accounting for $3.2 billion of that. This sum should be able to be absorbed by Morgan Stanley in the worst case scenario, but that did not seem to matter in yesterday’s emotional trading session.

This put spread is a bet that Morgan Stanley will continue to sell off over the coming months. The spread will reach its maximum profit if Morgan Stanley is at or below 18.00. In this case the spread will worth $5.00 and the risk is limited in the trade to the $1.79 paid upfront for the options. This gives the spread an excellent risk/reward profile and makes it an interesting portfolio hedge trade since Morgan Stanley is likely to see more downside if fears over Europe continue to grow. The

Comments

Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."


Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…