Tuesday, July 1, 2008

Two Trades

In my personal account, I did two things yesterday:

I put in an order at 6AM to buy these nice little illiquid tools called Fixed Return Options, a new derivative (how could that ever be a bad thing?!) invented by the administration of TradeKing, my online broker.

Anyway, how these things work, is that they are all-or-nothing contracts. If your contract finishes above the strike price (when you own a high-finish contract), you get $100 credited into your account. When it finishes below, it's worthless. The put-like options work the opposite way.

I bought Citi (C) high-finish options at the August 17.50 strike price. So, if the price (well, actually, a different metric that measures the average price of every trade that day, but basically price) finishes at $17.51 on expiration, I get $100. If not, it's worthless. The contracts were only $40 each, so the risk/reward was worth it to me. (I don't have a ton of confidence in Citi as a company, but I do think it's oversold, but regular options had premiums too high or were too far out of the money.)

The FROs can be sold before expiration, but since the market is pretty illiquid right now, it's best to hold as long as the trade looks like there's a good chance of success.

I also bought CIT after the bell at $6.88. It was down 15 percent on no real news yesterday; I figured it was just a financial company getting dumped as funds and firms window-dressed. This morning they announced that they are selling the home loan business, their most troublesome one, for some nice cash AND the forgiveness of lots of debt. It's over $8 right now.

As I wrote yesterday, I hope that this new month and quarter mark a turnaround for the market... but that doesn't look to be the case, at least during the opening of this first day. Hold on for the ride.

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