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Tuesday, December 28, 2010

smells funny

Back in mid November, Goldman Sachs issued a stock replacement strategy for some large tech stock. (link) Basically it was strategy to sell stocks, and replace the common with call options.

When I read about it that day, my ears peculated, cause IBM was one of the stocks highlighted by the report.

It caught my attention because the cynic in me always thinks of new risks. Goldman's call has been dead wrong because since their call, the lack of volatility has caused IBM's premium to get sucked away.

IMO, this smells funny.

I am a believer in the market's efficiency over the mid/long-term, but I know it can be grossly inefficient in the short-term. The inefficiency can be from many things, one of them being a pseudo manipulation.

It is just too convenient that a 'strangling-option-strategy' (at least that is what I call it), is fucking with Goldman's call. By sucking away call premiums, the pure-long call strategy is losing a ton of money, especially if in the Jan calls. (If you sold calls or puts, you would be making the lost premium.)

Leads to a ton of questions: Was the Goldman call the green light for the strategy? Are Goldman traders involved? Are the market makers facilitating the lack of movement? etc.

I am a guy who does not give a shit. I am a trader. I take advantage of these inefficiencies, so it is hard for me to get too pissed off, even though it is costing me right now. This is one of the reasons I was glad I pushed out my calls from Jan to April 2011. While funny activity can take hold within a low volume, lack of news environment, it will not last long.

It may last until the Jan 2011 options expire, or near that date, as the strangling unravels. But I will smile, if IBM produces some sort of news, to up their earnings profile or something that will fuck the strangling strategy and return the premium into the calls. The closer the year ends, and 4th quarter earnings are to be reported, this risk increases for the stranglers.

Or until some smart/independent-first-moving-heavy-handed mutual/hedge fund manager sees how consolidated it is, and how inexpensive it is, and starts buying a shit load of it in anticipation of the increased earnings profile, which can lead to multiple expansion.

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