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The Wall Street Bailout Plan- OP’s Perspective

Published on September 21, 2008

The Wall Street Bailout Plan- OP’s Perspective

September 21, 2008

The $700billion market bail out plan is disclosed and is for review withCongress. The Target is to get it to President table by Friday, according to Forbes. As per the same article– Treasury Secretary Henry Paulson “is in effect becoming the dictator of the American financial system for a few months, subject to congressional oversight,” said Wall Street historian John Steele Gordon, author of a book about the national debt. They are seeking unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.

I hope congress evaluates the plan going into deeper level of analysis so as to a) solve the crisis, b) Fix it for long term and c) consider the implication on average American. I hope they read the fine prints (If those were read earlier, the results wouldn’t have been so severe for the US economy). This massive bailout plan plus the past ones (~1 or more trillion dollars), almost of the size of entire Indian Economy (one of the pillars of BRIC) will be funded from the Taxpayer’s money primarily. So I sincerely hope that the guardians of world’s largest economy view this in all fairness to the small and medium and average American who had nothing to do with this mess but still need to pay for this clean-up (instead of letting these institution bear the sour fruits of their doings). US’s “Every Street” will now bailout “The Wall Street” ; and probably the guys who created the mess will still earn gazillions of $$$ in salary. If you would like to know more about this plan, read this straight forward explanation from New York Times. All eyes are upon US financial systems, how wizards solve this issue.

Let’s come back to Markets-
This was the largest two day rally since 1987 market crash. I think last week’s event provides a good story for a Hollywood movie that could be equally successful as “Wall street” if not better. On a bigger picture basis S&P 500 is almost flat as a week ago, as if nothing happened in a week that was full of pain, drama and a lot of emotional swings. So if we had such a huge rally, ideally I will be expecting huge volumes, IV crash especially for those financials. That should be the case. Really?

  • RVX, a measure of volatility on Russell 2000 index was in fact up in spite of a massive rally in the underlying.
  • VIX a measure of volatility on S&P500 was still above 30 and merely 3% down vs. a day ago.
  • Show me the volume- There wasn’t much of the volume in the financials in spite of huge surge (volume with respect to the down volumes we saw preceding few days). Goldman (GS), nearly half of the last two down days…AIG same; BAC, so so; Citibank (C), nearly 3/4; Morgan Stanley (MS), 1/3; Wachovia (WB), nearly 3/4; XLF, financial etf, half of the day before and lower than preceding 3 days; and IYF, DJ Financial Sector index, half of average of past few months and nearly 1/5th of the past few days.This is not what one would expect after such a massive “bail-out”….

Further more, even though it was a huge up day, for NYSE- Up volume was still less than 90% (my gauge for trend strength) and on Nasdaq it was close to 80%. Technically, all the key indices Dow, S&500 and Nasdaq all closed below respective 50 days moving averages. A lot is going on in financial markets. Not an easy pill to swallow. Even if you are right, you are now not sure which rule will be changed next and you’ll lose your shirts in spite of being correct. A baffled market that it is.

Trade extra carefully, Profitable trading, OP

4 Comments

  • Hello OP,

    Just curious, will this new short sale ban on financial stock will have any impact on the cost of opening a new put position on stocks other than financials? I know that thing will be tough for market maker to write new put options for financial because they don’t have any hedging mechanism against such contract yet. But will this will also be the case for market maker on non financial stocks?

  • OptionPundit says:

    Oskar, I have noticed that bid/ask spread has widened for almost all sort of stocks (maybe this was a expiration friday thing) e.g. even as liquid stock and establish stock as CocaCola. For a Oct 52.5 strike the bid/ask is nearly $0.25 on a $1.65 bid base. The same is happening on the indices for example Russell 2000. I think we’ll know more on Monday.

  • David S says:

    Hello,

    Can put positions still be opened on stocks on this new short sale list?

    Thank you

  • OptionPundit says:

    Yes, you can buy to open Put positions on these e.g. Goldman Sachs. But the bid/ask spread has widened significantly.

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