MartinKronicle

Boone Pickens on Picken’s Plan, Natural Gas, and Crude Oil

Michael Martin — Wed, 02 May 2012 12:57:18 +0000

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Barnes & Noble: How To Hedge A Short Sale (NYSE: BKS)

Michael Martin — Mon, 30 Apr 2012 12:56:03 +0000

News hit the tape that MSFT will invest $300 MM into BKS to support the NOOK. While we are 1 hour from the 9:30 am ET open, BKS is up 92% on the news, which has obviously caught everyone off guard.

The short sellers are getting murdered as they are buying frantically along with the new longs and existing longs who want to add to their positions. Short selling involves borrowing BKS shares, selling them, and purchasing them back at a lower price. In that instance the trader keeps the difference and returns the shares to the lender.

That’s when things work out. When stocks rise against the short seller, s/he loses money. And since their is no upper boundary to the shares’ price, the risk is said to be unlimited.

To hedge against this risk while short, a trader can purchase call options above the market price to capture any violent reactions to the upside, such as the one we see this morning. This is the best option, literally and figuratively, to offset the risk to the upside.

Selling put options against a short sale is technically considered a “covered” position, but the trader only gets to keep the option premium. If the stock drops far enough, the put option will be exercised and the short seller will be forced to repurchase the stock thereby covering the short position. The option seller keeps the premium also.

But that typically amounts to a few dollars which the put seller will get to keep. However, against a $13 rise, keeping $3 in option premium is the proverbial set of steak knives.

Most traders are taught rightfully to place protected buy stops above the market to purchase the shares and offset the short sales. In instances such as today, there is oftentimes no liquidity since the whole world seemingly wants to buy the stock. Stop orders become market orders once the shares trade “at or through” the stop price that the trader delineates on the order ticket.

If I’m short at $15 and I’ve placed my protective Buy Stop at $18, once BKS trades at $18 or higher, I will get filled at the market. That could be significantly higher. The first trade might not go off until $22. That is “at or through” $18, so there will be significant “skid” or slippage as it’s called on my order. Slippage and skid is an expense to the trader.

A trader could have purchased a call with a $15 Strike Price so that all of today’s news would have been captured in the option premium, thereby benefiting and hedging the short seller for any damage above $15.

The only way to capture that $4 slippage is by owning call options to hedge your short position (especially over weekends). Owning options is a pure hedge. Selling options is a partial hedge strategy and is typically used as a strategy to generate more income.

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Best Buy A Better Sell (NYSE: BBY)

Michael Martin — Sun, 22 Apr 2012 17:12:55 +0000

Best Buy is shuttering stores to help the beleaguered retailer shore up expenses.

Normally, layoffs and store closings will save money and are a step towards bringing the firm to higher earning per share (as well as cause a great deal of financial hardship for those laid off). However, I see this as a terrible leading indicator for what lies ahead for not only Best Buy, but other brick and mortar retailers.

One of the stores being closed in SoCal is literally right across the street from the UCLA campus in the Westwood section of Los Angeles. That would make you believe that they’d have 4 academic quarters of regular walk-in business from students who need and want the latest video game consoles, TV’s, cameras, and smart phones (UCLA is on a quarterly system, not trimesters or semesters fyi). And thus, if the foot traffic across the street from UCLA can’t sustain a physical location, the macro bet for me is that Best Buy’s days are numbered in all their physical locations.

The decisions that I make in Los Angeles to go ANYWHERE are always conjugated with 2 things: the time of day and the location. Depending on the time of day, you may actually be going against the traffic than be jammed in it. When this happens, it is manna from heaven from the traffic gods.

You may have heard that Best Buy is a showroom for shoppers to see the items they eventually go purchase on Amazon.com. That might be more of a foreshadowing than Best Buy wants to let on.

“No stock is too high to buy, nor to low to sell short.” Best Buy in this regard is a better sell.

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Abnormal Returns Book Interview With Tadas Viskanta

Michael Martin — Tue, 17 Apr 2012 07:51:21 +0000

Tadas Viskanta is the author of all things Abnormal so to speak:

Read Abnormal Returns – the book

Read Abnormal Returns – his blog

Follow Abnormal Returns – his Twitter handle

His blog is a must read and I’ve been reading it forever. He asked me for a quote for the back cover and it was my honor to oblige him. Needless to say, his is a great book.

Read the book, Read his blog, and Follow him on Twitter.

Oh, and Listen to the podcast.

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Video: Gotye Interview

Michael Martin — Fri, 13 Apr 2012 20:21:00 +0000

It’s hard to turn on the radio these days and not hear Gotye’s Somebody That I Used To Know within 15 minutes. Here’s an interview I did with him in Los Angeles recently. He’s very talented and completely unassuming. He’ll be the musical guest on SNL tomorrow night and then at Coachella on Sunday.

You can read my entire Gotye interview at Huffington Post.Similar Posts:

Steve Sears, The Indomitable Investor Podcast

Michael Martin — Tue, 03 Apr 2012 04:07:51 +0000

Barron’s Striking Price columnist Steve Sears is out with a new book called The Indomitable Investor.

The book is a rich discussion about how the market and its participants are oftentimes at odds with one another, and the latter usually paying a hefty tuition bill.

Sears best quote from the book goes a long way to describing why that is the case: “Bad investors think of ways to make money. Good investors think of ways to not lose money.”

Here is the podcast that we recorded and in which we discuss the book and several other provocative ideas such as Warren Buffett, Apple (AAPL), the downside to too much social media, and the value of being skeptical of everything.

Read my article about the book To Invest Like Warren Buffett, Learn How To Sell at the Huffington Post.

Follow Steve Sears on Twitter

Follow Michael Martin on Twitter

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Podcast: Jon Najarian & Invest Like A Monster Conference in Newport Beach CA

Michael Martin — Tue, 28 Feb 2012 08:23:59 +0000

I spoke with Jon Najarian about the markets today, as well as his upcoming education event in Newport Beach, CA in late March. What you can read below is a more in depth analysis of what we spoke about, plus it’s admittedly hard to envision the mechanics of option spreads, hence the pictures and graphs.

(click for larger image)

In the podcast, Jon mentioned right off the top that he’d shorted a Put around 1355, the Strike Price of which is indicated by the red line. His thought process was that the market opened weak and had had a tendency to rally at the Open. Selling puts is a bullish strategy and Jon used the weekly put contract as his vehicle of choice for this Day Trade.

As the rally extended Monday, the value of having the ability to sell the S&P 500 at 1355 would decrease. That value is expressed in the option’s premium, which Jon purchased back at a lower price much later in the day keeping the difference.

One trade that I taught to some of my students last week is the Credit Put Spread on AAPL (see below). It’s technically called a “Net Credit Vertical Bull Put Spread.”

(click for larger image)

Here, we sold the March 500 Strike Price for a $9.80 credit (the top red line) and against that we bought the March 490 Strike Price for a $6.70 debit (the lower red line). The Net Credit of $3.10 is our Max Gain on the trade and we make that if/when AAPL remains at $500 or higher (which is what we expect).

Break-even is $496.90 [$500 - $3.10]
Max loss is $6.90 which traders will incur at $490 or below

Spreads are hedged. That’s why you trade them. Sure you can sell the March 500 for $9.80 and you might get away with keep the whole thing…once in a while. However, I think Victor Niederhoffer demonstrated the brutality of being short naked Gamma overnight.

Here is the margin calculation, courtesy of CBOE:

(click for larger image)

Jon and his brother Pete, Guy Adami, as well as Anthony Scaramucci and Jeff Macke will be in Newport Beach, CA for their next education conference. These guy are solid citizens and they’re great to hang with besides being great instructors.

You can register now for the Invest Like a Monster™ option education conference.

As he mentioned in this interview, Jon and I spoke at the Milken Global Conference in Beverly Hills in May 2011. We also talked about being short options overnight. “Seller beware…”

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Financial Engineering Practitioners Seminar

Michael Martin — Thu, 09 Feb 2012 18:25:38 +0000

Jared Dillian

Aaron Brown

Michael Martin

I’ll be speaking with Aaron Brown and Jared Dillian at Columbia University Monday, February 13 at 6 pm.

Information on Financial Engineering SemiarSimilar Posts:

Gotye in Los Angeles

Michael Martin — Sun, 05 Feb 2012 21:40:57 +0000

I got to spend a little time with Gotye while he was in Los Angeles last week. I filmed about 30 minutes worth of an interview. Will have it up shortly.

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Street Freak Jared Dillian Podcast Interview

Michael Martin — Fri, 27 Jan 2012 06:39:36 +0000

Jared Dillian’s brain worked very differently from most of his colleagues. He had what I’d call these emotional tectonic plates inside his head that would shift in an instant. When they shifted, they’d tremor so hard, they’d make the fault lines along the San Andreas Fault sit up straight…and that’s not counting what happened as a result from his trading.

Dillian describes his personal journey in one of the most revealing memoirs I’ve read in the past decade. He is a very genuine person and his recent book Street Freak: Money & Madness at Lehman Brothers is written with a great deal of candor. I recommend you read the book — it’s written with a great deal of honesty and you can hear it come through in the podcast.

“Throughout most my adult life, I’d always felt that I experienced things differently from other people. I felt more. Instead of getting sad, I would get really sad. Despondent. Instead of being happy, I would be delirious. I would laugh, and everybody would turn around to look at the crazy man. Now here I was, crying in the middle of Seventh Avenue. But there was no reason for the crying. I was just walking down the street, and I fell to pieces.” – from Street Freak

Dillian is the publisher of the Daily Dirt Nap Newsletter, which continues the success of the market letter he wrote for his clients over the Bloomberg while at Lehman.

Jared, Aaron Brown and I are speaking at Columbia University on February 13, 2012 for an event called the Financial Engineering Practitioners Seminar

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