4th Update Jeffries (JEF): Closing Dec 10/5 Put Spread

by Dan November 23, 2011 1:53 pm • Commentary

4th Update Nov23rd 2011 at 3:25pm:  I just closed the balance of this position by selling the Jef Dec 10 Put at 1.00.

So lets recap:

I originally paid .85 for them and made .15, but the real money was made trading the dec 5 strike puts that I originally sold in a ratio.  I originally sold them at .20 and covered them at .09 so a .22 profit and then just last week I resold one of the dec 5 puts at .30 and covered earlier today for .15

SO my profit on the trade was the .15 from the Dec 10 puts plus the .22 from the initially dec 5s and then the .15 from the dec 5s this week.

SO a total profit of .55, originally paid .45


3rd Update Nov 23rd, 2011 at 1:56pm: JEF (10.50) is up today 5% vs most banks stocks that are down on avg about 3%.  I guess there is unconfirmed take-over rumors.  My sense is that no one buys Jeffries but they could get a capital infusion that would cause shorts to cover.  I want to now cover the Dec 5 Put that I sold last week at .30 for .15 (.15 profit) and hold onto the Dec 10 put into the close as I think we close poorly, but I will be closing out of the trade today.


2nd Update Nov 17th, 2011:  JEF is trading down almost 6% today below the previous lows made on Nov3rd and looking dangerously close to entering a death spiral to mid single digits.  Earlier this month I bought the DEC 10/5 1×2 Put Spread for .45.   A few days later when the stock rallied I bought back the Dec 5 puts that I sold at .20 each for .09 each.  I am now going to sell 1 Dec 5 Put at .30 against the Dec 10 Puts that I am long for .85    If the stock continues to go lower I will look to sell 1 more of the Dec 5 puts to re-create the 1×2 Put Spread.  This has been a great structure given the strikes and the movement of the stock in the last few weeks and has given me a lot of “optionality” to trade the position.  The ratio spread and the 10/5 strikes ensures that I am not short a tail, so I can keep trading this 5 strike as the stock goes up and down.


Update Nov 9th, 2011: With JEF about 6% lower ($11.50) in 3 trading days since putting this trade on, the Dec 5 puts that I sold last week at .20 each can now be bought back at .10 (I actually just bought some for .09).  At this point given what I believe to be the increasing severity of the financial crisis in Europe, I am going to cover the Puts that I am short for an .22 profit (.11 each, remember I was short on a 1×2 ratio) and run the Dec 10 Puts outright.  If there is going to be a sacrificial lamb in this crisis why not be a small brokerage firm where the market obviously does not believe their stated capital position or their exposure to European Sovereign debt.  Again I have no opinion on the matter other than the price action in response to the news coming out of the company, but as a trader I feel the all too familiar “where there is smoke there is fire” and it reminds me of fall 2008.


Original Post Nov 4th, 2011: Jeffries (JEF): Black Swan Edition, 10 to 1 Protection Against a Long Or An Outright Bearish Bet With No Tail Risk

There has been a ton of rumor an innuendo out there about Jeffries and their exposure to Greece and other Sovereigns in Europe since the demise of MF Global earlier this week.  The stock is down 18% this week alone, but up 20% off of yesterday’s lows…..

To summarize the recent events besieging JEF, NYT Dealbook has the following to say:

Trading in shares of Jefferies Group was temporarily halted on Thursday morning after shares plunged on sovereign debt fears.

Jefferies shares dropped more than 20 percent, to $9.79, a sharp drop that prompted the exchange to stop trading. After the stock resumed selling, the stock rose to more than $11, down roughly 8 percent from the close on Wednesday.

The sharp drop comes after Egan-Jones cut the credit rating on Jefferies.

Earlier this week, Jefferies said that it has “no meaningful exposure to the sovereign debt of the nations of Portugal, Italy, Ireland, Greece, and Spain.” It added that from time to time it takes positions in the debt of these countries but those positions tend to “short term in nature.”

Following the volatility on Thursday, Jefferies clarified its holdings, saying it “no meaningful net exposure to European sovereign debt.”

“Recent reports and calculations appear to have been focusing only on long inventory of $2.684 billion but not taking into account the fact that there were offsetting short positions in such sovereign debt of $2.545 billion as well as offsetting positions in futures instruments,” the company said in a statement.


The stock is up 2% as a I write, the company just released the following press release regarding their exposure to Europe.



NEW YORK and LONDON, November 4, 2011 – In response to inquiries, Jefferies is disclosing its position as of a few minutes ago in the sovereign risk of the nations of Portugal, Italy, Ireland, Greece, and Spain. It should be noted that the interest-rate risk on such positions is insignificant, with DV01 equal to only $37,000.

“These are fragile times in the financial market and we decided the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed,“ said Richard Handler, Chairman and CEO of Jefferies. “Later today, after the markets are closed in Europe and we have completed our inventory control accounting, we will post on our web-site our day-end, CUSIP-level holdings in the securities of these countries. We care for our clients, shareholders, bondholders and employees and want to allay any concern that may have arisen. As was the case yesterday, the facts about our sovereign debt exposure and other matters are straightforward and easily understood. We encourage all market participants and interested parties to review our public filings that contain extensive disclosure of the nature, extent and financing of our assets. Our firm stands on a solid foundation of over $8.5 billion of long-term capital and we look forward to continued success.”

“As is clear from this information, Jefferies has no meaningful credit risk in respect of the sovereign debt of these nations, and an insignificant risk related to interest rate movements,” said Brian Friedman, Chairman of the Executive Committee of Jefferies. “Jefferies is a leading market maker in the securities of these and other European nations, as well as a primary dealer in U.S. Government securities, and will continue to make an active two-sided market for our clients. These positions are held as inventory in the context of our market making activities and turn over frequently. Furthermore, nearly 95% of our financing of these positions is through central clearing houses.”


This is at least the second time this week that the company has emphatically come out and defended their capital position and their exposure to Europe.  I have no clue whether or not their assertions are correct but if I were long the name I would consider ways to protect against some severe downside that still offer the potential for snap back.

Readers of this site have seen me do this little “black Swan” trade in the recent past in some other names such as BAC and MS who at times this year have similarly been in the eye of the financial storm……but given the recent events of MF global and now the focus surrounding Jeffries (JEF) I think the options could set up decently for a similar structure offering a 10 to 1 payout with no tail risk….

With out any knowledge or strong conviction, and taking a page from the 2008 playbook, these sorts of situations have a habbit of morphing into a sell full-filling prophecy.  I have no particular knowledge or insight into JEF as a business or the exposure, but as a trader I like to look for opportunities to capitalize on uncertain and potentially volatile situations….

If you are inclined to get long at 12.23 to play for a bounce you could consider buying the following structure against it to mitigate some downside risk in the case of downdraft below 10.00 by Dec Expiration.


JEF $12.30 Buy the Dec 10/5 1×2 Put Spread for .45

Buy 1 Dec 10 Put for .85

Sell 2 Dec 5 Puts for a total of .40

Break-Even On Dec Expiration:

Profits btwn 9.55 and .45 up to 4.55,  max gain at 5.00 is 4.55 and the profit trails off btwn 5.00 and .45.

Losses btwn zero and .45 and 9.55 and 10 lose up to .45 and above 10 lose all .45

Or you can do this on an outright basis if you think there is a good chance that the stock sells off back towards 10 with the potential of going lower between now and Dec expiration.