In the "Worst is behind us" world of news for August 27th, 2008

Please correct me if I'm wrong, but isn't the cost of the IndyMac bailout now at 8.9B$ (http://latimesblogs.latimes.co...dymac.html) and wasn't the size of the FDIC reserve at 50B$? That would be closer to 18% than 25%.

Not that I want to split hairs.

I often read Mr. Mortgages site in addition to this one. His site is how I found Reggie's. Anyway, I am an options trader and while I saw the options action on the XLF today, I fully expected the bullish media pundits to come out in full force. Mr. Mortgage ran a quick post on FNM and FRE and mentioned the XLF Calls. His gut reaction was this didn't look right and it may be a contrarian indicator to him. Since I have some specific information on the XLF calls, I posted the following message on his post. I thought I would share it here, too.

CAUTION ON PILING ONTO THE XLF!!! Mr. Mortgage?s gut reaction to this is right on. Just because a bunch of calls were overloaded to one side, the volume numbers don?t tell the WHOLE story.

**NOTE: a large majority of those CALLS were SOLD not PURCHASED. What difference does that make, you ask? As an option trader, if I am that bullish, as just looking at the volume numbers alone indicate, I?d be outright BUYING those calls. Better profit.

Another trade could be a call spread. Buy one strike price on the calls and sell another strike price. This LIMITS your RISK and your PROFIT. Again, if someone is that bullish, why limit your profit???

Volatility is low, so the options are cheap. Another reason to just buy them.

Bottom line? With a majority of the calls being SOLD, someone is looking to take in premium for profit. That?s the overwhelming trade being placed. The premium will be taken for profit when the XLF DROPS in price. Did you read that? When the XLF DROPS in price!!!!

When you buy a call, you are bullish on the security moving up. You can do a call spread and still be bullish, but the bullish sentiment is not as strong. You?re adding some risk protection. If you want to make money if you think a security is going to drop, one way is to SELL a bunch of calls. You can buy some calls to limit risk, but your sentiment is the security dropping in price.

What a great way to SUCKER a bunch of people! Brilliant move and here?s why. FNM, FRE bounce on ?positive? news as the pundits spin it. A few other pundits say buy the financials as FNM and FRE don?t need a bail out. They?re in better shape than we thought! As if the pundits are now experts on Fannie and Freddie (most didn?t call it right on the way down, so most won?t call it right as these stocks rise). Buy financials as this is good news! GS, MS, LEH, MER, and C won?t loose a ton of money from a FNM and FRE failure. Now the brilliant move?.. ride the pundit media pumping by using the options market. Mr. Mortgage knows best how ?Headlines? are just that, Headlines. The Headlines don?t usually tell the ?WHOLE? story. So, what happens today? Example headline?. ?BULLISH BET IN OPTIONS MARKET ON FINANCIAL SECTOR!!!!? ?Calls to Put ratio is HUGE.?

What happens tomorrow? More CALL BUYING because people read headlines. Who are you buying those calls from? Somebody selling them to you and hedging their bet. Watch for large PUT buying soon.

I will leave you with this as another caution. Guess which ETF dropped a bunch today, but had one of the LARGEST INFLOWS of money? Yup, the SKF. The SKF is the Proshares Ultra SHORT Financial ETF. Note that it?s not the regular Proshares Short Financial ETF. It?s the ULTRA short which seeks a 200% gain as the financial sector DROPS in price.

Yes, while everyone piled into the XLF calls, I added to my SKF CALL position. My SKF calls make money as the financial sector tanks. As it tanks, people pile into the Proshares Ultra Short Financial ETF - the SKF. You can also buy PUTS on the XLF too. The DIA had one of the largest OUTFLOWS of money today. Profit taking on the DOW?s rise.

Bearish folks. Don?t trust the headlines. The PUNDITS are out in full force.

Kip
kcdallas23

I just want to stress something on my XLF post. The MAJORITY of the calls were sold. Not a semi even amount indicating call spreads. A majority were SOLD. They could have been or SOLD Naked, or SOLD against held XLF shares as a covered call (a way to make money by selling someone calls that will expire worthless or buying them back cheaper to close out the trade for profit). The point is that a majority were sold and that's a bearish to at worst, a neutral indicator.

Kip

kcdallas23: Thanks a lot for the information. May I ask how exactly you know that these were sold and not bought?

Georgia?s Integrity Bank Fails Friday, Aug 29th.

http://www.housingwire.com/2008/08/29/10-georgias-integrity-bank/

I found this article that supports kcdallas23 comments about them being sold.
http://www.reuters.com/article...28?rpc=44

to kcdallas23, thanks for the input, as a novice options guy, I appreciate hearing what others have learned. I don't have nearly enough time or money to make all of my own mistakes. Your observation gave me one more clue to look out for in researcing options.