MRA Equity Derivatives Daily
[Link]
August 6th, 2009
Dean Curnutt ExSqueeze Me
212-287-2640 The argument can be made that the combination of low earnings expectations, strengthening housing
dcurnutt@[Link] numbers and an underinvested market have all contributed to the rally in the market. However, one of
the powerful forces in this move higher that has led to the more violent swings has been the massive
short covering taking place. Short squeezes have occurred in names that reported better than expected
Gabe Catala earnings (for example in WFMI on Wednesday) and in names where investors are forced to unwind
212-287-2640 losing trades (potentially the case in AIG, CIT, FNM, and FRE yesterday). In both situations, these
gcatala@[Link] stocks experienced large moves higher causing market participants who were naked short to suffer
significant losses. Now, with the market 50% off its lows, many investors are re-entering short
positions, increasing the potential for future squeezes.
Justin Golden
212-287-2640
jgolden@[Link] Yesterday’s activity in the market was puzzling. The most widely hated financial stocks of 2009 were
up considerably, and the exact cause is still unclear. Stocks like AIG, C, CIT, FNM, FRE, RDN, MTG,
and ABK far outpaced other financials on volumes that were a multiple of recent average daily activity.
Danny Kirsch Chatter in the market about the outsized moves yesterday ranged from large short covering from a
212-287-2640 forced portfolio unwind, to outright bullishness on the back of the RDN earnings (the mortgage insurer
dkirsch@[Link] swung to a profit and posted much smaller loss provisions than expected), to private investors taking
stakes in equities that the government has a hand in. Though it is not exactly clear where the euphoria
originated, the commonality among the names is that they have been heavily shorted issues as of late.
Jon McLaughlin Investors who were skeptical used the options market to express shorts rather than fight the strength.
212-287-2640 AIG front month implied volatility was up nearly 100 points and C saw in excess of 2 million options
jmclaughlin@[Link]
trade yesterday. The ratio of calls to puts traded in many of these names was staggeringly high.
The table below looks at the members of the SPX with the highest short interest as a percentage of float
Phillip Rapoport
212-287-2640 that report earnings before August expiry. We believe these names are most susceptible to short
prapoport@[Link] squeezes due to the combination of low earnings expectations (which so far have been beaten often due
to cost cutting) and crowded positioning. Investors who are short these stocks may consider buying
upside 10 to 15 delta August calls as a hedge against their short stock position (a strategy we
Jon Simblist previously discussed in a piece in April Freshly Squeezed). Also, investors looking for cheap options
212-287-2640 and not involved in the names may consider buying these 10-15 delta calls as a play on an earnings
jsimblist@[Link] beat. Often times, these options will expire worthless but in some cases can offer a nice payout. For
instance, investors who bought the WFMI August 30 calls on Tuesday for 30c woke up on Wednesday
to see those options worth as much as a 1.25 following a large short squeeze after better than expected
earnings (short interest as a percentage of float is 17.7%).
Short
On Bloomberg: Ticker Name Report Date YTD Return
Interest/Float
JWN Nordstrom Inc 8/13/2009 114% 19%
ANF Abercrombie & Fitch Co 8/14/2009 32% 17%
AIG American International Group Inc 8/7/2009 -29% 16%
CRM [Link] Inc 8/20/2009 41% 13%
PDCO Patterson Cos Inc 8/21/2009 32% 12%
SHLD Sears Holdings Corp 8/20/2009 85% 12%
MCHP Microchip Technology Inc 8/6/2009 45% 12%
HAR Harman International Industries Inc 8/14/2009 50% 11%
JCP JC Penney Co Inc 8/14/2009 60% 10%
GME GameStop Corp 8/20/2009 12% 10%
Source: MRA, Bloomberg
This document has been prepared by Macro Risk Advisors’ (“MRA”) Sales and Trading Group for informational purposes only. MRA does not publish research
reports as defined under FINRA Rule 2711. MRA does not trade proprietarily, and is not acting as an advisor or fiduciary. MRA does not guarantee the accuracy or
completeness of information which is contained in this document and accepts no liability for any consequential losses arising from the use of this information. Any
data on past performance, modeling or back-testing contained herein is no indication as to future performance. All opinions and estimates are given as of the date
hereof and are subject to change. The options risk disclosure document can be accessed at the following web address:
[Link] Please ensure that you have read and understood it before entering into any options transactions.
