Drop In Silver Attributed To $1 Million 37% Downside Bet On SLV

http://www.zerohedge.com/article/drop-silver-attributed-1-million-37-downside-bet-slv

My sentiments on this?  Who knows, and who cares.  Nothing moves up or down in a straight line.  You ride a bull market as long as the fundamentals are intact, and don't get shaken off by the bull.  You use technical analysis and chart patterns to optimize your entry points, and perhaps partial exits for trading.  But you don't sell your core position in a secular bull market.

Bears were declaring silver was a bubble at $15.  They're the same geniuses who missed the bubbles in internet stocks and Vegas real estate.  So until the debasement of the USDollar ends, BTFD (buy the friggin' dip) in precious metals.  Where's the popcorn?

See disclaimers in the side bar.

Disclosure:  long precious metals mining shares.  As for the physical precious metals, none of your business.

SEC vs. Goldman Sachs revisited

A blog on senior SEC officials spending an inordinate amount of their work hours looking at porn during work hours was entered last week:

http://gregnguyen.blogspot.com/2010/04/sec-officials-watching-porn-on.html

My cynical take was that Goldman Sachs, the accused in the SEC's fraud case, leaked these findings to the press, in order to discredit the SEC (which doesn't need it, given their horrific track record of being asleep at the switch).

I also blogged this entry, hinting at a clever strategy of how a company can profit from its own share price collapsing.

http://gregnguyen.blogspot.com/2010/04/goldman-puts-soared-friday.html

This is my speculation on the recent events. It's a false choice of two black hats.

The SEC, for all its ineptitude, filed fraud charges against Goldman Sachs last Friday. Their private investigators and captured journalists probably went into overtime to find the dirt on the normally shiftless, asleep-at-the-wheel SEC.

Goldman Sachs may have profited from the announcement of the lawsuit. $1,000 turned into $140,000 in less than a minute Friday when the out-of-the-money put options went deep into the money--on the day which those March put options expired. Coincidence?

Let's continue the speculation. Someone within the SEC could have tipped off someone at Goldman Sachs, so Goldman's cronies could place bets on the shares of Goldman Sachs tanking. The volume on Goldman puts options leading up to last Friday's options expiry was suspicious. In other words, Goldman could have bet on their own shares tanking--and made a huge profit in the process when it did tank upon news of the fraud case being filed by the SEC.

But the SEC is too stupid or too corrupt to chase its own tail. And they also picked the weakest case to prosecute. This case is about one smart investor (hedge fund manager John Paulson) betting on the obvious (shorting subprime mortgage bonds) and monkeys taking the other side of the bet. But it makes Obama look like he's fighting the banker fat cats on Wall St. to appease the populist anger among the masses. Again, the public doesn't understand the parasitic relationship between Wall Street and K Street.

Goldman Sachs CEO Lloyd Blankfein has been at the White House four times times since Obama has taken office, and Goldman was the second largest donor to his campaign. Goldman is a staunch supporter of the Democratic party, given their long history of placing executives in Democratic Administrations (Robert Rubin being the most prominent). It's one thing to publicly admonish big bankers gone wild publicly; it's another thing to make back room deals behind closed doors. If there are dismissals at Goldman, expect golden parachutes for their executives.

I'm surprised Jamie Dimon hasn't been targeted. JPMorgan Chase has allegedly manipulated markets with impunity and there is nary a whisper from the regulators. There is a long list of potential targets among the big banks. Let's see where that leads us to. I'm betting on misguided regulation after the fact, which will only hurt the small businesses so crucial in economic growth. They are the growth engine of America--not bankers profiting from rigged markets.

The financial system was robbed of tens of trillions of dollars on derivatives of hundreds of trillions of dollars, and all the SEC can come up is to scapegoat one 31-year old trader? Reform is an illusory ideal, as the rot in our financial system still exists.

Goldman puts soared Friday

http://www.bloomberg.com/apps/news?pid=20601110&sid=aw4bmHoGJh5s

$1000 worth of Goldman put options soared to $400,000 by the end of the day. There was heavy put volume leading up to expiration day. Ya think someone got tipped off that the US Government was going to charge Goldman Sachs with securities fraud?

The gold put option (courtesy of China)

The Chinese are providing a floor on the price of gold:

http://moneynews.newsmax.com/streettalk/china_gold_put/2009/09/09/257918.html

This is not an old theme in these blogs, but now, the Chinese aren't being as evasive about it. They're coming out and declaring they aren't happy with the US Treasury's printing presses.

Short Squeeze vs. Selling Panic

When Apollo Group announced explosive earnings growth earlier in the week after market close, the share price plummeted in after hours, and continued its torrid selling pressure through most of the trading session, ending up the day as one of the worst-performing stocks in the exchanges.

After market close today, Research in Motion (Blackberry manufacturer) mildly beat earnings expectations, and the share price immediately rocketed up after hours, and will open tomorrow up almost 30%.

Why the difference in outcomes? No one knows for sure, but I'll speculate APOL's future guidance by management during the earnings announcement was poor, despite the past quarter of explosive earnings growth and increased enrollment at the University of Phoenix. Allegations and a history of lawsuits and fines by the Department of Education regarding business practices and high default rates on student loans has clouded this company for months. The counter-cyclicality of for-profit education companies has taken their share prices to lofty valuations. Despite great earnings--which are backward-looking, future guidance--or more correctly, lack thereof, doomed this stock. Markets don't like uncertainty, and Wall St. is a forward-looking mechanism.

With RIMM, earnings beat expectations, and margins came in at 43-44%, both above Street projections. But more importantly, despite looming bad economic horizons, RIMM rewarded investors confident in holding market share and profit margins going forward.

Two similar earnings projections, two totally different outcomes.

My put options on APOL paid off handsomely earlier in the week, and the share price is in the process of consolidating and recovering from the bloodbath. I will not make any recommendations for regulatory purposes and also because I am neutral on APOL, having closed out my puts for a nice profit. I still have a small long-term put in place that I have mostly closed out and taken profits on.

Disclosure: I own January 2010 APOL put options, and neutral to slightly bearish.

For-profit educators getting pummeled

Making money on the short side is certainly easier in a bear market. Apollo Group (think University of Phoenix) shares tanked overnight DESPITE beating earnings estimates and enrollment increases by a long shot. My May, August and January put options soared as a result. I closed out my May puts due to expiration next month, but I kept my August and January puts in case this stock drops further. After some due diligence, there are way too many lawsuits and scrutiny into their sales practices and accounting of student loan revenue. The new Obama administration won't take kindly to any accounting irregularities. As I don't want any scrutiny, please Google "Apollo Group Citron".

What's Gone Wrong

I'm looking at live video of the restless masses forming in London to greet the G-20 members and I'm thinking this is a microcosm of what's going on worldwide--not just apathy against globalization and banking, but outright anger against capitalism. This is a bad omen on equities and risk capital, in general. We officially now have blood on the streets for the world to see. This is only the beginning, in my opinion.

Buyers of Arena Pharmaceuticals shares took a bath, despite good results in the phase III clinical trials. Lorcaserin, the obesity drug with huge potential, met all FDA end point guidelines regarding efficacy and safety, yet the market punished its stoct because apparently, it wasn't enough to satisfy analysts with poor understanding of the biochemistry behind it. Two years ago, when risking capital was in vogue, the share price of this drug soars from $4.50 to $25 on this good news. Instead, it dropped to $3.

With investing, one has to be grounded with reality--intellectual honesty is fine, but one has to play the cards one is dealt. The price is what it is--no time to play coulda shoulda woulda. Lorcaserin should be approved and this should drive its share price up, whether it's via a co-marketing agreement or an outright buy out offer by a big pharmaceutical company looking to bolster its depleting drug pipeline, as more and more blockbusters go off-patent, impacting profit margins.

So here I am, sitting on losses of 25% to 50%, depending on my entry points. What to do? Two things I plan on doing:

1) Sell covered calls - for each 100 shares owned of ARNA, sell 1 covered call option at a strike price of $5 and as far out in expiration as I can stand to hold on to the stock. The further out expiration month I sell, the more premium I collect. This should completely or partially offset any losses from this trade. This strategy will allow me to collect the premium upfront, irrespective of the direction of ARNA shares. And if ARNA stays at or below $5 during this expiration period, I keep the premium no matter what, and the call option I sold expires worthless--good for me, bad for the option buyer. If ARNA soars above 5, my call will be exercised, meaning I sell my shares at $5, and I still kept my premium. This limits my upside, but that also means I made a 67% profit from selling my shares at $5, PLUS I still kept my premium. This gives me a profitable exit strategy as well as a great hedging opportunity. The only way I lose is if the stock goes down further, but again, I still kept the premium, so it reduces my losses. Covered calls are a way to increase my income while reducing my downside. Just remember to stay covered: I will not write (sell) more call options than I have actual underlying shares. 1 call option contract= 100 shares of underlying stock. In other words, if I own 1000 shares of ARNA, I will sell 10 call option contracts, as each options contract obligates me the right to sell 100 shares at that strike price.

2) To further reduce my downside, I can also buy put options, betting on a further decline in ARNA share prices. But now I have to pay the premium to the put option seller, and now I can lose that premium if the stock doesn't decline. In other words, now I am the casino player--instead of the casino as I was in a covered call. But it protects my position, in case ARNA runs out of cash and drops to $1 or zero, for instance. The value of the put option increases as the share price decreases, so I can profit from the put in the case of the decline in share price. This strategy requires cash outlay, but it gives me leverage and protects me from catastrophe.

As a shareholder, the covered call strategy really has no downside, and only limits my upside. The put options have some downside, because the options can expire worthless whether ARNA stays constant or increases in price (which is a good thing as my underlying stock value rises). A put option is insurance, albeit carries a premium. By contrast, selling a call option makes me the insurer, as I collect the premium. So definitely sell a covered call, and possibly buy put options. Both buying and selling options requires an upgrade one's account, so one has to apply or contact the broker. One needs the ability to write covered calls, and to buy call and put options.

ARNA could have a nice run, and the profits will come in long-term as big pharma should see value in Lorcaserin. But this market is so skittish that if no offer for a buy out or partnership agreement comes through, we as shareholders need to protect ourselves. And if the stock price does rise, we can also participate on the upside. The covered call is a sure way to hedge, while the put option COULD be a great hedge, but also costly--I could lose 100% of my premium upon expiration. As a minimum, one should utilize covered calls. Depending on how pessimistic I am with ARNA, I may or may not buy put options. I could also do both, as the premiums I collect on the covered call can offset the premiums I pay for the put option.

Disclosure: I own shares of ARNA. This is not a recommendation, and do your own diligence. While covered calls are a conservative strategy of increasing income, the downside is that the price of the underlying stock could decline. Put options are inherently risky because one can lose 100% of the premium on expiration.

Educators Cratering

My put options on a for-profit education company gapped up big on Tuesday, as concerns about fraud and business practices surfaced. My investment thesis about these educators remain intact: students are better off attending junior colleges as they avoid the $70,000 student loan debt they incur by attending these for-profit schools. If they are going to shell out that type of tuition dollars, they are better off attending accredited universities. While I won't go so far as to declare these for-profit schools scams, I will say job prospects for graduates are sketchy at best. Factor in a tough job market, and you can imagine their ability to repay these massive student loans is minimal.

These company stocks have had a long, explosive two-year run up, against the backdrop of a declining stock market. The conventional wisdom is that these schools thrive as unemployed individuals go back to school, seeking to upgrade job skills. This prevailing investment thesis has worked, but the run is over, as graduates face a rising probability of defaulting on these student loans.

I normally don't short shares, as your losses can theoretically be unlimited if stock prices keep climbing, but I have used put options to limit my losses. Even if the time value of options decreases, puts and calls allow investors to realize much bigger profits. Having said that, the put options have been immensely profitable, because the price declines have been swift, as the price action has broken support levels.

I would posit that put options on the market overall have been very profitable. I chose to short this educational segment due to:

1) overall market weakness: if a rising tide lifts all boats, a receding tide sinks most boats.
2) this for-profit educational sector has had a terrific run up the last 2 years
3) this sector looks especially vulnerable fundamentally due to lack of government subsidies going forward, questionable sales practices, poor value proposition education-wise
4) poor price action and volume technical indicators
5) and most damning, heavy selling by company insiders.

When the company's biggest supporters and executives are selling their own shares at high prices, the average investor should sit up and take notice.