Other than that Mrs. Lincoln, how was the play?
 |
Matthew Buckley Options University.com |
|
The VIX shot up over 55% this past week, reminding the market that volatility can only go so low. But even with this recent spike, we’re ‘only’ at 27 vice nearly 50 a year ago. This proves the old options axiom ‘when vol is cheap, you buy it; when vol is expensive, you sell it.’
There have been several catalysts that spooked the market: China announced they were tightening their monetary policy, Greece channeled Abu Dubai, Massachusetts fired the ‘second shot heard round the world’, several companies reported tepid earnings, Apple (AAPL) launched the iTouch on steroids to a resounding thud, the president declared war on Wall Street, and Fed Chairman Bernanke’s confirmation appeared in doubt. Markets don’t like any of this uncertainty and used all these events as an excuse to take some chips off the table after the sprint from March.
Move along now; there’s nothing to see here...
The president suffered a crushing blow to his agenda with the election in Massachusetts and needed to decide quickly where to point his populist rage cannon. The obvious choice: Wall Street. The president enlisted Paul Volker, former Fed Chairman and financial grown up, to announce his intention to crack down by reviving Glass Stegall-like regulations. The intent is to ensure banks don’t mix prop trading and hedge fund-like businesses with traditional commercial banking operations. Apparently it doesn’t matter that prop trading wasn’t the main cause of the financial meltdown.
I’d like to know why Treasury Secretary Geithner and financial consigliere Summers were unusually silent and playing second fiddle. My guess is they know that this attack, while politically smart, is economically neutral to negative. Goldman Sachs (GS) and Morgan Stanley (MS) will run back to where they came from, or mighty Goldman may even go private as some on the Street have murmured. It’s easier doing “God’s work” when you’re not a public company. A firm like Jefferies (JEF), who has flown under the radar of both Wall Street and Washington, can continue on in stealth mode undetected (I have a synthetic options position in JEF, long/short Jan 2011 calls).
I never thought I’d see the day when Congressman Barney Frank was the voice of reason. While the president sounded like he wanted to immediately grab pitchforks and march on Wall Street (past the smoking hulk of healthcare), Frank delivered a dose of Washington insider reality by saying reform would take years (cue the rally in financials). Senator Dodd, apparently not as tone deaf as others in his party, suggested they take a break, “maybe a month or so”, from taking over everything. FranknDodd are right.
While I agree that financial firms who employ FDIC funds should not be allowed to prop trade, the president is using a shotgun when a sniper would suffice. It was interesting political theatre to see the president going after Wall Street in Ohio, a state where unemployment stands at 10.9%, a full point above national average. The president demanded, “We want our money back!” Funny, most of America is saying the same thing, but not to Wall Street.
Shockingly missing from the president’s demands to get ‘our money back’ (or not) were calls to reform firms like GM, AIG, Fannie Mae (FNM), and Freddie Mac (FRE). Not that the president asks me for advice, which he obviously should, but I strongly recommend he focus on job creation in lieu of populist lynchings to get this economy on a sustained path to recovery.
The question that remains to be answered is whether this selloff continues or if the strong fourth quarter GDP report has provided a circuit breaker for the markets. Many feel relief that the market pulled back, eliminating some of the guilt they felt by making money in a market they never truly believed in. Several traders I’ve spoken with think this pullback is healthy and will not accelerate. Others are keeping their powder dry waiting to see if we’ll experience a deeper pullback of the 10% kind. I have a ‘break glass in case of emergency’ bear call spread on the SPX that helps me sleep at night. A little.
Now is a tough time to protect yourself, but it’s still possible. Buying puts now is like purchasing hurricane insurance in Florida with a storm on top the Bahamas. It’s expensive, but there’s a reason. All the talk of a correction could be a self-fulfilling prophecy and we may see another leg down start in earnest this week, especially if the ‘sell on the news’ atmosphere continues to spook the market.
Matthew "Whiz" Buckley is the Chief Strategy Officer of the Options University, the leading provider of options education for options traders of all levels. He is also the Managing Partner of Check6 LLC, a business-consulting firm specializing in leadership development, risk management, and strategic planning for Fortune 500 companies and related organizations. Whiz flew the F-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings, and flew 44 combat sorties over Iraq. After leaving active duty he rose rapidly though corporate America, starting as Managing Director of Strategy at a Wall Street firm, to CEO of a financial media company. He is an internationally recognized speaker and combined his unprecedented experiences in the military and corporate America in the writing of From Sea Level to C Level.