MS has clearly been the punching bag of choice for U.S. bank/brokerage stocks as a sort of proxy for the troubled weaker capitalized banks in Europe. Frankly, while i have been short banks and the XLF through put spreads and flys all summer, I really don’t get the panic in the names as they have not been intimately associated with much of the problems that could face SocGen or BNP if there was a messy default in Greece. The problems that I see with our banks is more a crisis of confidence similar to what we saw in 2008, but different in that our banks appear to be in an infinitely better spot from a capital situation.
That being said it hasn’t caused me to not continue to look for opportunities to make money in the event of a banking crisis here caused by unforeseen events that likely have to do with a domino affect of Euro ‘stuff” and a global recession. Earlier in the summer I suggested a 1×2 Put Spread in BAC in Jan12 which had no risk other than the small premium outlay. This trade has been a decent winner with continued fantastic profit potential with very limited risk…..I want to look to do the same thing in MS….I want to be clear, I have no knowledge or strong belief that this company has any specific problems, but if 2008/2009 has taught us anything, the unthinkable can happen……I want to scatter my trading book with low probability but high profit potential trades if in fact we do get a meltdown in the coming months…..and the truth is we could.
The other day MS management sent email to employees reassuring them of the strength of the company, none of which I doubt, but back to the 2008 playbook this really doesn’t matter if we are going to hell in a hand-basket, and that email will be exhibit A in the height of a crisis of the beginning of the end….I am not saying this is going to happen, but in the unlikely event that it does the following structure will be a huge winner.
TRADE: MS ($14.55) Buy the JAN12 10/5 1×2 Put Spread for .50
-Buy 1 Jan12 10 Put for 1.26
-Sell 2 Jan12 5 Puts for a total of .76 (.38 each)
Break-Even on Jan12 Expiration:
Profits: btwn 9.50 and 5 make up to 4.50, at 5 make 4.50 (9x your money), btwn 5 and .50 your pay off trails off again.
Losses: btwn 9.50 and 10 lose up to .50, btwn .50 and Zero lose up to .50 and above 10.00 lose all .50.
* I executed this for .48 so in spreads, as always and specifically ones with more than 2, always use limits.
TRADE RATIONALE: I love the idea of being right on a long shot, especially when there is massive profit potential. I am using some of the profits from bank shorts this summer to put this low probability bet on…I am risking what I am willing to lose.
At the moment I am not a fan of ratio spreads for most investors as we could be in a period of undefinable risk, but this trade you are not short a tail (due to the fact the stock can only go to zero and therefore can only lose .50 on the trade if it did) which I love.
We have had a few questions on how that MS trade works.