US Markets Go From Bad To Worse On Record AIG Loss

Things went from bad to worse. We had our fourth down day and AIG (AIG) announced that they have broken a record by posting the largest Q4 loss in history. On a positive note, the S&P did not break 700, but all eyes will be on that level tomorrow. I had mentioned in the midday that I wanted to discuss strategies that you could look at to implement in this market environment.

First, you have to determine your sentiment, Bearish, which I deducted from looking at the charts and the revised economic forecasts. Second, measure the volatility in the market, high/ moderate/low, use the VIX (^VIX) at 52 which is high compared to its average of 22. If you are looking at individual stocks, look at the Historic vs. Implied Volatility. At this stage I see the general volatility of both the overall market and most stocks high. Our time frame is short, 30 days tops. So if I am Bearish, Volatility is high and I have a short time frame, I could look at Vertical Spreads, specifically bearish, where you sell At The Money calls (ATM) and buy Out of The Money (OTM) calls. This strategy takes advantage of a bearish trending market and the heightened implied volatility as well allowing you to sell call options with a fixed risk parameter. Numbers to watch tomorrow, 700 on the S&P 500 (^GSPC) and I would watch the Pending Home Sales for Jan at 10:00 ET.

After Hours

Stocks suffered steep losses Monday amid ongoing fear about the problems in the financial world, jitters about the global economic outlook, and a steep slide in crude oil prices. After losing about 940 points during the month of February, the Dow Jones Industrial Average finished the first day of March with a 300-point loss. All 30 Dow stocks lost ground and Citi (C) was the biggest loser within the industrial average. Shares extended a decline that started Friday when the bank said it had entered an agreement with the government to swap preferred shares for common stock. Citi and some of the other financials also suffered early losses after HSBC (HBC), Europe’s largest bank, said it was cutting its dividend and raising $17.9 billion in capital by selling discounted stock to shareholders.

With financials once again under pressure, relatively little attention was paid to the day’s economic news. Data released before the start of trading in New York, showed personal incomes rose .4 percent and spending increased by .6 percent in January. Economists had predicted a decline of .2 percent in incomes and an increase of .4 percent in spending. A report released later showed a surprise up tick in February manufacturing activity. The ISM Index improved to 35.8 from 35.6 last month. Economists had expected a decline to 33.8. Modest improvement in spending and manufacturing wasn’t enough to ease investor jitters. The NASDAQ closed down 55 points and the S&P 500 fell 34.28 to 12-year lows. Crude oil sank $4.06 to $4.70. Trading in the options market was active, with approximately 8.3 million puts and 7.8 million calls traded on the options exchanges.

Bullish

Unusual trading activity surfaced in Las Vegas Sands (LVS) late Monday. Shares fell 9 cents to $2.19 and 46,000 calls traded on the day, compared to just 740 puts. The top trade of the day was a block of 37,000 June 7.5 calls bought for 25 cents. Similar activity surfaced in MGM Mirage (MGM). Shares fell 45 cents to $3.05 and it appeared that an investor bought 19,000 June 7.5 calls for 25 cents. The interest in these deep out-of-the-money puts is unusual because there is a very low probability that they will be in-the-money at June options expiration. Bullish trading was also seen Foot Locker (FL), Fred’s (FRED), and Ivanhoe Mines (IVN).

Bearish

Talisman Energy (TLM) shares fell $1.01 to $8.35 and trading turned bearish Monday. 4,300 puts and 650 calls traded. March 7.5 puts saw the most action. 2,665 contracts traded and about 60 percent hit ask-side of the bid-ask spread. April 7.5 puts were also being bought and implied volatility rose to 86, up from about 76 the day before. It seems that some investors were bracing for additional volatility in the Calgary-based oil and gas company ahead of earnings due out later this week. Bearish trading was also seen in Anadarko Petroleum (APC), Best Buy (BBY), and Cerner (CERN).

Index Trading

The CBOE Volatility Index (^VIX) surged amid heightened fear and increasing risk perceptions Monday. VIX, which is sometimes called the “fear gauge” because it often moves higher when stocks fall, rallied 6.37 to 52.72 and its highest levels in more than one month. The move in the volatility index was accompanied by increasing volume in the options market as well, 67,000 calls and 17,000 puts traded, as some investors bought March calls with strike prices ranging from 50 to 70 on worries that volatility might continue rising from here. In addition to the VIX, S&P 500 Index (^GSPC), the Dow Jones Industrial Index (^DJI), and the Russell 2000 Small Cap Index (^RUT) had among the more actively traded contracts. 711,000 puts and 556,000 calls traded across all index products.

ETF Trading

The Dow Jones Transportation ETF (IYT) lost $3.00 to $41.81 and fell to a new low after the Dow Jones Transportation Average slid 6.6 percent and its lowest levels since April 2003. IYT options volume rose to 11 times the normal levels. The 50/45 put spread was active early. It traded 4000 times. It looks like an investor sold the spread and opened a similar position in the June 40/35 put spread. It is possibly opening of a June spread and closing of a position in the March spread, which was likely opened on January 30. The exchange-traded fund is down more than 20 percent since that time. SPDR Trust (SPY), the Powershares QQQ (QQQQ), and the Select Sector Financials (XLF) had among the more actively traded contracts. Trading was active, with approximately 3.3 million puts and 2.7 million calls traded across all exchange traded funds.

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Comment by Pat

2009-03-03 22:30:29

$61.7 billion AIG loss found by Detroit man off of I-75

$61.7 billion AIG loss found by Detroit man off of I-75 »

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