Friday, May 22, 2009

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