New MS Trade and Some Updated Thoughts on the Brokerage Sector

by Dan October 28, 2011 2:59 pm • Commentary

Here’s a trade I’ll be talking about on Options Action tonight:

NEW TRADE MS:  Well, I clearly got the direction wrong this week, but with some of the trade management (below) I was able to mitigate a good bit of the damage.

At this point I have a couple small Put Spreads on in MS, one in Nov and one in Jan, both were conceived when the financial world as we know it was coming to an end….

Now the world looks a little different and I feel financial stocks are at a bit of an inflection point.  U.S. banks clearly got punished this year for a ton of diverse reasons from regulatory issues, to mortgage write-downs/settlements relating to mortgage securities and then the final straw was the guesswork regarding exposure to European Sovereign debt.  Now some of the issues are in the rear-view mirror (at-least for the next couple months) the question that has not been answered is whether or not the non-money center banks business models are still intact.   My guess by the Q3 results that we just got from the sector that the answer is far from clear.  Now this is obviously a much longer term issues and while bank stocks appear to be a little near term over bought, there are plenty of headlines out of Europe that could cause weakness in the stocks near term

MY NEW MS TRADE: I just Bought the MS (19.20) Nov 18/17 Put Spread for .20

-Bought 1 Nov 18 Put for .50

-Sold 1 Nov 17 Put at .30

Break-Even On Nov Exp:

Profits btwn 17.80 and 17 make up to .80, max gain at 17 or lower make full .80

Losses btwn 17.80 and 18.00 lose up to .20 and lose all .20 above 17.

TRADE RATIONALE: stock has rallied 60% off of the Oct lows and this trade takes advantage of a 10% re-tracement of the move by Nov expiration offering a healthy 4 to 1 payout…..  I like the risk reward and the odds of the trade.  I want to define my risk, I think there are plenty of risks being naked short these stocks as the year end affect that we could start after a consolidation period could clearly lure large institutional players back to this space as they look for names that could outperform the broader market.

This is a medium conviction trade, but as I said above, I like the risk/reward and the timing for a potential pullback given my sense that the market has gone too far too fast.


Update Oct 25th 2011:  With MS and GS down a little more than 2% each I want to manage yesterday’s put purchases a bit……GS is first on the agenda as it is a weekly option and will start to decay quickly the longer it remains above the strike I am long…..

In GS’s case with the stock at ~$101 I want to sell half of the position at 1.40 for almost a .40 gain.  and then sell the Oct28 95 weekly put at .40 locking in another .40 gain, thus risking little between now and Friday’s close while leaving on 1/2 of my original position but now capping my gains at the 95 level.

For MS at ~16.60, I want to sell the Nov 14 Put at .35 and creating a Nov 16/14 put spread that I am now only risking .29 for a $2 wide Put Spread…..

Original Post Oct 24th, 2011: 

The Easiest Way in My Mind to Fade This Rally Is to Short the Banks

The SPX is up almost 18% in a straight line since making new intra-day 52 week lows 20 days ago……Enough is enough……Since covering most shorts Oct 3/4/5th I have added a few on a tactical basis in front of events and believe it or not even added some longs……At this point, equity markets are acting irrationally and I think this could set up to be a great opportunity to get short in front of the second Euro Summit (Wednesday) that is very likely to disappoint….

There is no doubt that it appears that our markets are rallying for the reasons they should be, healthy US corporate earnings…..and CAT‘s report and outlook this morning might have been the nail in the coffin for the bears…..

But away from Tech and Industials,  the banks are now extended, there I said it, and I think the rally off of the lows this month could be shaping up as a great near term opportunity to short a space that will get destroyed if Euro leaders and finance ministers can’t enact a solid plan to contain their debt contagion…..

I wan to look at MS and GS…GS because in my opinion it trades very poorly off the lows, and MS because it has acted so well off of the lows….


GS vs stock at 103.20 I am buying the Oct28 weekly 100 puts for 1.00

MS vs stock at 17.07 I am buying the Nov 16 Puts for .69

Both names I will look to leg into Put Spreads as the stocks start to go lower…..