Adam Warner, at Daily Options Report, follow up on FMN strategy and discussion of the rules on Evil Naked Shorting.
Fannie, Freddie and Gary
To clarify on the FNM before, I’m not necessarily saying a volatility sale is the way to go. Just noting that IF that’s your choice of play there, I’d go with a non-directional one like a straddle or strangle sale. Pretty easy to manufacture straddles/strangle sales where you take in enough premium to buy the stock under 0. Which kind of implies the risk is those periodic short squeezes that ALWAYS show up in spots like this.
Anyway, speaking of The Shorts, funny moment on TV yesterday as Paul Kedrosky "debated" a principal in a company called LocateStock.com who oddly enough was in favor of stricter and stricter shorting rules. Paul was psuedo-defending shorts, although the way the debate on TV always gets framed, that position becomes equated with endorsing all the cheating that goes on (it’s not). Then it took a bizarro turn; I’ll let Paul himself explain.
I had a surreal moment on CNBC this morning. In talking about proposed changes to the SEC’s new-ish short-selling rules, I cited a recent IMD study showing that market quality deteriorated during the last month or so for the 19 stocks covered by the initial SEC ruling.
And what was the response to this from a fellow CNBC guest who was frothing in favor of more rules, especially ones banning the already banned practice of naked short-selling? "I think it’s interesting that a columnist for TheStreet.com is citing a European study."
Hello? I guess he lives by that old rule, When you cite a European study, the naked short-sellers win. Who knew market facts were so geographically contingent?
Not sure what Paul was thinking, it’s well known facts and data are indeed European constructs.
OK, seriously, what actually threw me in the debate was the 3rd guy, Robert Shapiro, former Undersecretary of Commerce. He kept throwing out the non-European generated fact that there were something like 1 billion failed short shares every day in the first 3 month’s this year, 70% of which were concentrated in just 100 stocks. And it was imperative to crack down on this.
Agreed, so stop saying we need to crack down on it, and f***ing crack down on it if it’s so vitally important. The borrow/locate rule "change" is utter smoke. Have a zero tolerance policy on fails, and severely punish repeat offenders such that the punishment outweighs the profit they make on the actual trades. And sic Gary Busey on anyone that refuses to comply.
The SEC position here kind of reminds me of the owners position in MLB regarding steroids. They basically want to talk a tough game and pretend like they’re doing something to stop Evil Naked Shorting without actually doing anything that realistically stops Evil Naked Shorting. The motivation is painfully obvious; Wall Street generates a fortune on stock loan, as apparently do the mutual funds that actually lend the stock.
