Quick Expiration and Bearish Bet Primer

I’m writing this post ahead of time and putting it in the vault. Er, rather, the time stamp, so it will pop up on Expiration morning.

When I went to “press” (or if you prefer, went to sleep) there were rumblings the SEC was going to ban short sales. I assume new short sales. But for all I know all stock shorters were rounded up overnight and sent to some holding station in Belarus, while all long sellers will now be forced to fill out a full W-2 form for each sale, as well as one page, single-spaced written essay explaining why exactly you would like to sell your stock. Approval should come in the snail mail within 6 weeks of when the government receives your paper work.

News or not though, remember that SPX options expire on the opening print today. Opening print being a calculated price based on where each SPX component opens. So for anyone who has expiring SPX positions, VERY tricky to hedge. Basically if you’re short and the SPX moves against you pre-market, you’re chasing. Gamma is effectively 100 on every option as it gets near the money, so it’s the perfect time to announce some sort of new Gov’t action to get maximal impact.

And while we’re at it, how about a quick primer on Ways Someone Big And Evil Enough to Go Short Enough Stock That He Can Cause His Own Meltdown Can Still Make Bearish Bets Without Ever Shorting a Share. Prices may vary. We’ll soon see how exactly this new rule will impact everything.

He can buy puts.

He can buy puts and short calls.

He can buy puts and short calls on the exact same strike and expiration and have virtually the exact same position as if he shorted stock.

He can buy DEEEEEEEP puts and stock, and then bang out his long stock.

He can short an ETF like the XLF and then buy the stocks in the basket he doesn’t want to be short.

Want to ban shorting ETF’s too? He can buy the SKF and get double the fun and again, buy the component stocks he doesn’t want to be short.

He can short Single Stock Futures (hat tip Don Fishback).

I could go on. Chime in if you have more.

Notice none of these things need a plus tick either.

In other words, you and I will get inconvenienced by each and every new impediment they put up, but nothing short of dumping Short Players in water and seeing if they can float (credit to Paul Kedrosky on that one) will ultimately stop them from making bearish bets.

As if that’s a desirable goal to begin with.

So what exactly are these new shorting rules?

The SEC has said that most traders who missed the deadline delivered shares within five to 10 business days and that the delays are often due to clerical errors or mistakes. Still, the SEC is eliminating the wiggle room and saying that if a trader doesn’t deliver shorted shares within three business days, then he is prohibited from short-selling the same stock unless the shares are actually borrowed ahead of the bearish bet.

The SEC is also tightening requirements on market makers for options and making it illegal for a customer to mislead a broker about having located stocks and then failing to deliver them.

OK, I never quite understood the “clerical mistake” mulligan. A rule is a rule, mistakes happen, you have to face the consequences. I can’t think of one other trading rule that you can weasel out of by claiming a clerical mishap.

As to customers misleading their broker? Great, but why wasn’t that actually enforced beforehand.

And as long as we’re going there, how about punishing brokers who lend out the same stock to multiple parties, sort of like The Producers hadning out 10% stakes to 50 different people? From what I understand, that was a way bigger issue as far as fails went than anything else.

And the MM exemption? I opined yesterday, but as Floyd Norris says here.

Presumably, market makers will be hesitant to write puts on shares that are hard to borrow. Or at least they will charge more. Either way, it will be more difficult or more expensive to bet against a company.

Very true (and Abnormal hat tip) . But is this ultimately beneficial? Many rallies of borne of put owners and stock shorters chasing everything in sight. If you basically dry up the put market, you’re also going to lose some natural buyers.

To me, it’s all another half-baked scattershot approach. It’s a sop to the Blame the Shorts crowd that allows Cramer to get on TV and declare his 4700th “Game Changer” moment but does not actually change much of anything.

Now it’s interesting the plus tick rule didn’t come back. Is this the bullet they’re holding onto for some sort of maximal impact? To go with this trial balloon about some sort of hedge fund short disclosure?

My opinion on all of it is that it’s overblown smoke that obscures the simple fact that shorts are way down on the culprit chain after the I-Banks themselves, Sir Alan, et. al. But regardless, it’s complete wasted energy to rue the rules whether you agree with them or not. This is the market backdrop we have, and our job is to trade/invest in it.

OK, guess we didn’t actually bottom on a 30 VIX blip. I would now classify these prices as *real*. For whatever that’s worth.

My strong advice would be to disregard anyone that rattles off 20 measures that show we are oversold, in fact extremely oversold. Disregard me too in that respect.

News flash: We’re oversold.

A basic VIX look says to get bullish if the 10 Day SMA gets more than 10% above the VIX. It’s now close to 30% above. The put/call is soaring as well.

If/when we turn up, the Punditocracy will point to some magical VIX number that signaled the bottom. It’s 20/20 hindsight at it’s finest. We’ve already deviated significantly from the January and March implosion action when we gapped down like this, but then basically held, while options declined a bit.

The problem is that if you’re a slave to some sort of *rule* like that, you already got in the market way early. Even a powerful rally may only get you back to Square 1, a fact that is glossed over on TV when the market turns and the pompoms come out.

I wish I had sage option-y advice to give in these situations, but it’s basically a complete unknown. The few spots I have long gamma, I’m gingerly buying stock back. And I’m running out of ammo. If I initiate something new, I’m using either calls or call spreads (I’m not putting on short positions here). GS is the only spot I added *gamma* yesterday, and it was effectively in the form of butterflies. I’ve flipped a little stock independent of options, but pretty disciplined with stops. GOOG looks interesting lately.

So this is why they invented options, for times like these. Volatility will clearly soar on the opening bell. But again, there’s nothing wrong with overpaying for options in volatility terms under the right circumstances. These are the right circumstances. You can pay the absolute top in volatility and still make a very nice trade if you get the direction right. You also only risk the debit on the option if you’re dead wrong directionally. Call (or put) spreads are fine too, but not sure it’s really any difference in this particular environment than simply buying. A debit is a debit.

The one near certitude is we’re not going to sit at the opening levels. We may crash. Or The PPT  may come to our rescue.

Well, we know The PPT will do something, we just don’t know if it will be enough. The plus tick rule may come back. It seems like horse out of the barn already stuff now, but who knows, at the right moment it could cause a pop.

And kudos to CNBC. Futures down 48 points, but they just told me “it could have been worse”. Terrific, very insightful.

Some interest in Pfizer calls today as the Oct 20’s have traded 11,565 times in the first hour, or roughly half the open interest. And it looks like buyers.

Now before we get all thrombolic on this one, keep in mind that even though volatility is near 52 week highs, those highs are pretty low. It’s under a 33 volatility.

Also keep in mind that low volatility and low price in the stock translates into a very low dollar investment. The calls are offered at 24 cents.

And of course all Pfizer products come with a disclaimer. If the call buying should persist for more than four hours, call your physician. And the SEC.

So way back in 1988 (gasp) I started in this biz as a market maker on the AMEX. One of our products was Kroger supermarkets (KR). And all of a sudden, David Lee Roth is out of Van Halen, and Blue Horseshoe loves Kroger and volatility goes nuts. LBO rumors I think, or whatever they called it back then.

But no deal. Kroger stayed independent with some sort of monster special dividend that amounted to something like 80-90% of the stock price.

Fast forward to today and those rumors are back.

KR (28.1) Upside call options are active on chatter of possible take out…Sep implied vol up over 11% & the 30c have traded almost 3x the open interest. The co is also scheduled to release earnings on 9/16 which fall under Sept options expiration. Also seeing buying of Oct 30 & 32.5c.