Although we officially scratched a short position in this vehicle a few weeks ago, a subscriber with more patience reported in the chat room that he planned to stick with it. Why would we have exited if we are so certain JNK will continue to fall? The answer is that our short position consisted of out of-the-money puts that stood to be losers if the ETF died a slow death. That is quite obviously what is happening, and we doubt that buyers of out-of-the-money puts will make much money no matter how far JNK falls.
To be sure, JNK is on its way down to 34.84 over the near term, and to 20.88 on the long-term charts. Even then, I would still regard this dime-store-perfumed heap of financial excrement as wildly overpriced. The decline and fall of JNK would be all to the good, of course, since many of Wall Street’s most delusional fat cats are certain to hold big positions in it till the very end. For our part, the only way to make money on JNK is to be short it. But with puts? Most probably not. The would-be sellers of those options are just as bearish as we are, and they have priced the puts accordingly. At yesterday’s close, for instance, just-out-of-the-moneys were trading with implied volatilities three times that of the underlying vehicle. So short the ETF itself on rallies, by all means. But don’t belabor the carnival midway illusion that you can make money with puts merely because JNK is headed into oblivion.