Great Trades

Great stock trades based on fundamentals and technical analysis.

Friday, March 20, 2009


GE March $10 calls expire worthless, market action

With GE closing under $10 at options expiration, the GE March $10 call options we sold for .30+ are expiring worthless.

For speculative traders who were able to buy back GE in the upper 9's, sell near the $11.20 open yesterday, and hold on to the short March $10 calls naked (i.e., not covered by long stock), that means a very nice gain of about 15% in two trading days. For the GE shares sold and calls bought back early yesterday, the gain was much smaller, but allowed room to add to shorts around the 800 level on the S&P 500. For the GE shares still held, the calls expiring worthless lowered the cost basis by .30+.

The GE call expiration, along with the partial covering of short positions today to lock in some nice gains, has significantly reduced the risk in our open positions and allows room to reshort in case of a market bounce. Still, because our open positions were nearly maximum short, they're still heavily short considering our more positive intermediate-term outlook, especially with speculative trader positions still leveraged short (over 100%, using margin or leveraged short ETF's).

Based on various indicators, including some we posted on Wednesday night, we believe there is more selling to come before this market pullback is over. Below are the updated hourly charts on the S&P 500 and financials ETF:

Both charts clearly broke down from rising wedges, with bearish divergences on indicators that moved lower while prices moved higher. Amazingly, the financials ETF closed today's after hours session down for the week, despite the strong 18%+ rally during the week. The triple-long financials ETF (FAS) closed the after hours session down over 4% on the week after rallying over 51% during the week. There was definitely some frothy action this week.

We plan to continue to scale out of shorts on further weakness, eventually getting back long when our indicators turn more positive. This has been a very interesting market, and should remain so in coming weeks.

I've been reading your blog religiously, and wanted to thank you for a job well done! I appreciate your regular posts, and all of the valuable analysis! You're a market-junkie's dream come true!
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