ARCHIVED COMMENTARY
Paying Up
To Get Short
For edition of June 20, 2006
I’m a real tightwad when it comes to buying puts and calls, since the odds are so heavily stacked against retail option players that one cannot afford to give up even a dime of edge when entering or exiting a position. That said, it is becoming increasingly obvious that put options are no longer available in quantity at bargain prices, if at all, and that we may have to pay up to get short.
(Click on image to enlarge)
Our experience was telling yesterday in Citi, a particularly enticing short because it has so very far to fall. I’d recommended buying some Citi September 45 puts, noting that it might not be easy to get filled at our price. Here is what I wrote:
“Citi is not at or even near a hidden-pivot rally target, but we'll try to short it anyway, since the risk of missing the stock's inevitable collapse is high relative to the danger of getting squeezed for a measly point or two by its cagey handlers. For today, bid 0.60 for ten Sep 45 puts (CUI), contingent on the stock trading 48.25 or lower. Please note that these are not the kind of puts that are given away; they are more like collectibles, acquired only by traders who are patient enough to keep bidding for them every day, all day long.
How Bargains Happen
“When would they come in for sale? Quite often, the process begins when puts of another series -- one that trades more frequently and in greater quantity -- come in for sale at a great price, prompting the market makers to buy them in size. They would need to hedge this purchase in some way, and that's where our 0.60 bid might come in handy. To the extent they are aware of our bid and are prepared to hit it in order to hedge another opportunity, they are said to be "leaning" on the bid.
“More likely is that we will simply have to pay up for Sep 45 puts, so keep your bulletin launcher switched on if you would like to be apprised of any changes in my strategy. The September 47.50 puts (CUW) are a better deal at current prices, so I'll suggest bidding for them as well, if you can, on a one-order-cancels-the-other basis. Bid 1.20 for six with the stock trading 48.25 or lower, o-c-o.”
Monday Sucker-Punch
As it happened, even when Citi was trading well above my 48.25 limit, at 48.77, the September 45 puts never got any lower than 0.65, a nickel more than our bid. What this suggests is that, in order to have bought the puts, we’d have needed to buy them on the offer, paying about 20 percent more for them than their fair value. Although the very thought of doing such a thing horrifies me – trading puts and calls, that is, as though we were some schmuck with a Schwab option account whose hobby is losing money – we may just have to get used to the idea of paying at least a little more for puts than they are worth.
Meanwhile, no less challenging will be adjusting to another fact of life in a secular bear market – namely, that juicy rallies will be fewer and farther between, as witness the fact that Da Boyz could squeeze only a measly ten minutes of lambs-to-the-slaughter buying from a Monday morning opening. In all likelihood, the best opportunities to get short may come only if we are willing to risk stepping in front of a speeding truck, so to speak, shorting into rallies like the one that sent bears scrambling for cover last Thursday.
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Learn My Secrets
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