3 Reasons I’m Betting Against AIG

Update: Die AIG Die!

I just purchased a put spread on embattled insurance company AIG (AIG). I’m now long the October $45 puts, and short the October $43 puts. Since I never bet big money in options trades, this isn’t a large position for me.

In a nutshell, here’s why I pulled the trigger:

1) The stock went from $12 to $55 in a month on a combination of short covering and momentum traders driving it up. I think those traders are set to flee soon. The stock is down hard today, and I think anyone buying the dip will get crushed as the momo guys exit the name.

2) There are questions as to whether the stock is even worth anything:

As AIG's shares have more than doubled in the last nine sessions, the company's bonds still trade at levels that indicate the company's shares may be worthless, according to Peter Boockvar, an equity strategist at Miller Tabak & Co. "The value of the company is still the same," he said. "AIG bonds tell you that the equity is possibly worth nothing and that they may not be able to pay back the government."

3) The Financial Select Sector SPDR (XLF) is up nearly three-fold from its March lows, and the sector looks very frothy. We’ve seen some economic indicators come in better-than-expected, but is the economy heading back to growth mode? I don’t think so. Back-to-school could be absolutely BRUTAL.

FYI – I also recently went short Sony (SNE).

Thinkorswim: Still Awesome After Ameritrade Merger

Yes, that is the thinkorswim monkey caught with a bottle of Jose Cuervo. Apparently, the thinkorswim/Ameritrade post-merger celebration was one hell of a party.

A reader emailed to ask if thinkorswim has changed since its merger with TD Ameritrade (AMTD).

Let me give you a quick summary of how I work with thinkorswim:

I probably use about 20% of TOS’ capabilities. I trade stocks from the long and short sides, and use fairly basic options strategies – vanilla call and put purchases, some synthetic longs, and I’m starting to tinker with call spreads. As I wrote yesterday, I hate covered calls and no longer trade them, but TOS gave me no problems there. I make some use of the charts and news capabilities, but don’t play much with the Analyze and Scan features.

From a usability standpoint, nothing has changed. The TOS software is pretty intuitive and customizable. It is also extremely stable. The platform has only crashed on me one or two times in the past year and it started right back up with no problems. That’s on a buggy Vista-powered laptop with 2 gigabytes of RAM. And even when I only had 1 gig loaded, the software ran smoothly with no hiccups.

Thinkorswim’s customer service remains spot-on. I mostly use the online help via the Support/Chat button at the top left of the screen, and I’ve been satisfied 100% of the time. The customer service reps are extremely well-trained and know the system from top to bottom.

The only time I didn’t receive an instant answer to a question was when I asked how some random volatility calculation was made. In less than 24 hours, a senior thinkorswim staffer emailed me the answer in plain English.

I also have no complaints about trade executions. I often get filled at prices better than my bid, and trades are completed in the blink of an eye. Account statements are also updated instantly. Perfect!

Now I have been tempted to switch to Interactive Brokers (IBKR) for the cheaper commissions - thinkorswim is not expensive, but IBKR is seriously dirt-cheap. However, customer service always trumps a lower price for me, and I’ve been treated extremely well by thinkorswim. I’m not going anywhere.

I Hate Covered Calls

Exactly 11 seconds before the close on Friday, I had what alcoholics refer to as a moment of clarity. It was when I decided to stop playing with covered calls.

Some people spent that afternoon in the Hamptons. I spent it hoping that Raymond James Financial (RJF) would finish below $22.50.

See, a couple weeks back I decided to sell out-of-the-money calls against some of my stock positions. The market was feeling kind of frothy, and this was an easy way to get paid while the market pulled back.

Simple, right?

My simplistic and narcissistic thinking angered the trading gods, who immediately decided to extend the rally just long enough to piss me off. The stocks I sold calls against no longer looked like they were topping - they were heading to the moon! Perfect World (PWRD) wasn't stopping at $40. It was headed to $50! NOW!

The only solution was to buy all the calls I sold back, because I was suddenly not cool with the idea of forced into selling any of my long stock positions. One by one, I covered my short call positions, the final one being those pesky RJF August $22.50's at exactly 3:59:49 PM.

When I woke up this morning, I looked at my account statements from the past year or so.
I bought Central European Distribution Corp. (CEDC) at $8.45 and sold at $10 in a covered call position. That stock is now at $33. I shorted Research In Motion (RIMM) puts (short puts are roughly equivalent to covered calls) when the stock was in the $40's. That stock is now at $77 and change.

The trading gods punished me for not having enough conviction in my best trading ideas. Like many people, I get angry when I lose money. But I get really angry when I think about how much money I could’ve/would’ve/should’ve made if I had bought this or that - kind of like when my Mom gushes about $35,000 Park Slope brownstones.

So I'm done playing with covered calls. I'm trying to make money and giving away the upside for a few bucks just isn't helping.

Deep In The Money Call Options – What Are They?

So what is a Deep In The Money Call Option?

Call options with stock prices above their exercise prices are considered to be “in the money.” A deep in the money call has an exercise price significantly below the current stock price.

For example, if Apple (AAPL) stock is trading at $151, all options with strike prices below that are considered to be in the money. There isn’t a standard definition of what makes a particular in the money call option earn the deep distinction. I personally consider strikes more than 30% below the stock’s current price is continued to be deep.

Baseball legend and former TheStreet.com (TSCM) newsletter writer Lenny Dykstra has popularized the use of deep in the money calls. However, myself and others consider them to be high-risk instruments due to the leverage of call options. Large amounts of money can be made if a stock goes up, but fortunes can be quickly lost if a stock heads south.

How to Trade After Hours With Thinkorswim

If you’re a thinkorswim customer like me, I’m sure you’ve been overwhelmed at least a few times with the sheer number of features available on the thinkorswim platform. Well, right before my stupid Activision (ATVI) trade, I realized I couldn’t remember how to trade after hours! It took me a few minutes to figure it out – just long enough to lose a little money!

So for your benefit and mine, I’m going to explain how to place a stock trade after hours with thinkorswim in five easy steps.

In this hypothetical trade, I’ll be buying Microsoft (MSFT).

1) Click the “Trade’ tab and type in a ticker:

Since I’m buying, I'm going to click on the ‘Ask’ of $23.60.

2) Look at the ORDER ENTRY TOOLS section near the bottom of the screen:

3) Click on the word DAY on the right side of the screen. You’ll see a drop-down menu with the choices DAY, GTC, and EXT. Select EXT, which stands for extended:

4) Enter your limit price in the Price column, and click the Confirm and Send box at the bottom right hand of the screen.

You should see the Order Confirmation Dialog:

5) If you like what you see, click Send and you’re on your way!

What’s Hot? Leveraged ETF Lawsuits!

-“I took out all the Wheel of Fortune slots and put in a leveraged ETF machine. I’m tellin’ ya Nicky, the big guy in Kansas City’s gonna be real happy. The only problem is, sometimes these guys come and they lose it all. What do they want from me?

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So I did a Google (GOOG) News search for my favorite topic, Leveraged ETFs, and look at the headlines that popped up:

A Class Action Firms Looks at Eight B-Ds Over Leveraged ETFs

Notice From the Securities Law Firm of Klayman & Toskes to All Investors Who Invested in Leveraged and Inverse Exchange-Traded Funds

Dimond Kaplan & Rothstein, P.A. Investigating Leveraged and Short ETFs Sold by Merrill Lynch, Smith Barney, LPL Financial, Ameriprise, Edwards Jones, UBS, and Morgan Stanley Smith Barney

As I predicted in my recent article on Leveraged ETF’s for Minyanville, lawsuits were inevitable. When you mix complex investments with a public too lazy to do their own homework, you simply create havoc.

Do these lawsuits make sense? Let’s look at the ProShares FAQ:

No. Nevertheless, although no one can predict future performance, an empirical study of historical data demonstrates that over relatively short periods that are longer than a day, there can be a high probability that a leveraged fund can approximate its daily target. The longer the time period that a leveraged fund is held and the more volatile the underlying benchmark, the greater chance that the impact of compounding will cause the performance of a leveraged fund to deviate from the daily objective over time. This deviation may be significant.

And a quick reminder of what Direxion, manager of the FAS and FAS 3X Leveraged ETFs, has on its homepage:

Direxion Shares ETFs seek daily investment goals and should be used strictly as short term trading vehicles. Please read the prospectus and visit our Education Center before investing.

These companies never made promises they couldn’t keep. They never hid the risks of these wild instruments. Any reasonable person who took 5 minutes to glance at a prospectus before laying down their bets would know they were playing with fire, and that they were gambling. Sometimes you win, and sometimes you lose.

Making highly leveraged bets on market direction during periods of extreme volatility is incredibly dangerous.

Is it a surprise that things didn’t work out perfectly?

In related news, media outlets are reporting that Wells Fargo (WFC) is laying down restrictions on client activity in leveraged ETFs, including higher margin requirements. This is a good idea -- we don’t need brokers exposed to self-destructing gamblers who fail to make good on what they owe.

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Dumped Activision (ATVI) After Hours

I just wanted to give you folks a quick note – I sold Activision (ATVI) after hours. The guidance just wasn’t strong enough for my liking, even when factoring in the delays of Starcraft 2 and Singularity.

The market’s had a huge run and the stock trades at a significant premium to Take-Two Interactive (TTWO) and THQ (THQI), where I see more upside in the near term. So it made more sense to just dump the stock and take the tax loss now – I don’t want to hope it rallies just when the market seems to be turning down. This move also frees up cash for other trading ideas I’m throwing around.

And a quick update on Perfect World (PWRD) – I sold the August $40 call options against my common stock position. The stock’s been ripping and I’m in a hold mentality – I definitely don’t want to buy it, but I don’t think it’s quite fully valued yet. So if the stock keeps going up, I’ll be forced to sell at about $41.14 – about 11% higher from here. Covered calls don’t always make sense but in this case I believe it’s the best way to play.

The company reports earnings on August 10th and I believe a significant beat is already priced into the stock price – so it could easily sell off in the event of an upside surprise.

Wednesday Linkfest! – iProd Edition

It’s been a while since I’ve done a link roundup, but given the ramping traffic on this blog, I definitely need to send some love back out into the world:

1) Russian Submarines Patrolling East Coast of US – I live in NYC so this weirds me out just a little bit. Are we going back to the Cold War? You remember those days – when 34% of movie bad guys were Russian (the remaining 66% were ninjas or gibberish-speaking Eastern Europeans) and we needed Rocky to montage the USSR into submission.

2) Adam Warner’s Daily Options Report discusses Goldman Sachs’ (GS) letter to clients regarding its electronic trading practices. The Goldman hate is getting a bit out of control so I doubt this letter will calm the growing number of conspiracy theories out there regarding Goldman’s hold on the world. Speaking of which, I can’t find the new PC mouse I just bought. Could Goldman be behind this theft?

3) The US Marine Corps. banned social networking applications including Twitter, MySpace, and Facebook from its networks, effective immediately. The only question I have to ask is: Are they more afraid of information coming in or going out?

4) Wall Street Greek provides a comprehensive recap of today’s earnings reports, including Proctor & Gamble (PG), and economic numbers.

5) CrunchGear has me asking myself: WTF is an Apple (AAPL) iProd?

That’s all for today – I’ll try to do these more often. Thank you for reading!

Lenny Dykstra & Ron Insana: Two Peas in a Pod?

It’s not the most accurate title in the world, but Lenny Dykstra’s former and Ron Insana’s current newsletters for TheStreet.com (TSCM) have something in common -- taking credit for investment recommendations made before the newsletters even launched.

On his website, Lenny posted a lengthy missive on his controversial Amdocs (DOX) trade, including the following claim:

In June, I finalized the agreement with TheStreet.com and my columns began to post at The Street. However, initially—we were NOT allowed to show any of my pre-street picks in the scorecard; they wanted nothing to do with them.

The scorekeeper again explains:

“I was creating two separate stat books—one for The Street and one for Nails. . . . However, when a few wins—pre-Street wins—started to add up . . . The Street finally allowed us to bring in all Lenny’s pre-Street picks (his wins & those still in play)—including Amdocs—into the stat book, so then I only had to create one.”

And as I posted before, Ron Insana’s newsletter used a similar practice in its launch:

The problem is that Market Movers is taking credit for investments made BEFORE IT EVEN LAUNCHED. Sorry Ron, but that’s just not how investment newsletters work. Your subscribers did not receive the recommendations (since the newsletter didn’t even exist) that drove your alleged performance, so you have no basis for claiming this return.

Are TheStreet.com’s newsletter marketing practices getting a little too aggressive?

I believe so, and so does Henry Blodget:

Ever signed up for one of TheStreet.com's investor services?  Then you've probably also received an occasional email like the one below.

It's a personal note from "Jim Cramer."  And it uses the oldest sleazy investment marketing tactic in the book.

What's that?

Cherry-picking.

In an attempt to get you drooling about how much money you'll make if you pony up and buy a subscription, the letter describes a few amazing calls Jim has made in recent months.  Goldman Sachs!  Nike!  GE!  What the letter doesn't do, of course, is describe all of Jim's terrible calls.

This is what many newsletters (and investment managers) do: Tout their good calls and ignore their bad ones.  And they do it because it works.  But for anyone who takes their advice and clients seriously--as Cramer purports to--it's misleading and sleazy.

All I know is, during my time at TheStreet.com, performance measurement and marketing were handled in the most conservative manner – no kind of shenanigans of any kind were ever even suggested, let along implemented.

I’m awfully curious to see TheStreet.com’s second-quarter earnings results, which have been delayed as the company finalizes its numbers. It saw a 12% drop in subscription revenue in the first quarter – could the company’s overly-aggressive marketing practices help it bounce back?

Given the company’s huge cash balance, I’ve been tempted to wade into the stock as a deep-value play. After all, a rising market should directly benefit their subscription and advertising businesses.

But this is all just a bit too much for me...

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Leveraged ETF Bans Are Out of Control

As you may be aware, Wall Street firms like UBS (UBS) and Raymond James Financial (RJF) are getting out of the business of offering leveraged ETFs. I argue on Minyanville that this growing movement “is all just a way of absolving investors and their advisors of personal responsibility.”

Continue Reading Leveraged ETF Ban Spreading Like a Virus

On the same topic, Fidelity Investments became the latest firm to speak out on leveraged ETFs:

“…Leveraged and Inverse Mutual Funds are complicated instruments that should only be used by sophisticated investors who fully understand their risks. Due to the effect of compounding, operating expenses and daily resets, the performance of Leveraged and Inverse funds over longer periods of time can differ significantly from the performance of their underlying index or benchmark.”

Fidelity is striking a good middle ground here. The primary reason may be so they can keep collecting commission on leveraged ETF trades, but they’re not going so far as to declare them bad or evil or off-limits.

Disclosure: Long RJF

Ron Insana’s Doing It and Doing It and Doing It Well

Ron Insana just made an interesting move in his Market Movers newsletter:

Earlier today I talked about a melt-up in the markets, which may very well be in the cards. But I also told subscribers to my "Market Movers" newsletter later in the morning that I was taking my entire portfolio to cash.

It was, admittedly, a shocking reversal to my recent stance on the markets and my views on longer-term investing. But the reason I moved to cash, as a manager of real money, as opposed to a model portfolio, centered on prudent portfolio management.

The "Market Movers" portfolio had gained roughly 47% since its inception through early this morning.

I ragged on TheStreet.com (TSCM) and Ron for what looks look a shady way of measuring performance: namely, launching an investment newsletter on June 29th that takes credit for investments made since March 13th -  a date suspiciously close to the market bottom. I’m also a bit peeved at the newsletter’s disclosure section which I discussed in this post.

At the time of my ragging, Ron was just a teensy weensy bit ahead of the S&P 500 – now it looks like he’s crushing it. I HATE the fact that his performance number is based upon starting on March 13th, months before the newsletter launched, but I can’t argue with the fact that he’s starting out pretty damn hot.

And Ron might be right – it might be time to lock in gains. Futures are already turning down on profit taking, the Personal Income numbers weren’t so hot, and we have an unemployment number coming on Friday. Who the heck know how that could turn out?

I’m awfully tempted to book gains in Perfect World (PWRD), though I’ll most likely sell call options against my common stock. The implied volatility readings are a bit fat and I can take in $1.40 or so for the August $40’s – not bad at all. It might even make sense to sell something like the March 40’s which can be had for well over $6.

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Related Content:

My take on Ron Insana’s Market Movers Newsletter

Lenny Dykstra Loves Jews

Lenny Dykstra, the topic of many a posting here, recently posted a synopsis of his deep-in-the-money call option strategy. It was pretty straightforward, with Lenny explaining that “There is always a risk in investing and no one should ever place property that they cannot afford to lose on the table” (excellent advice) and that I wanted to be extremely careful in any investment tactics I sought to employ, because I really do HATE losing.

Nothing wrong with all that – it’s pretty sensible, even if I do think his investing methods are overly risky.

Then things started to get interesting. Read for yourself:

“By using LEAPS (think of them as options with Methuselah-like lives) and DITM calls, I noticed that my dollars were about as safe as a pig in a Yeshiva.”

I doubt this would have slipped past TheStreet.com’s (TSCM) editorial team…

If anyone’s offended, Lenny might pull this off his site, so here’s a screen snip for your enjoyment:

 HT Adam Warner