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SKF – Proshares UltraShort Financials

admin on 06 10, 2010

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Update 8/20/2010 10AM

Since our last update, the ETF has sold off to slightly above $19 and rallied back to $22.5 today.  The market is selling off and this inverse ETF looks like it could rally hard.  We will play it somewhat conservative here with a small profit.  I am taking a wait and see approach for what news comes out over the weekend.  Long term outlook is still very negative on this economy, so holding this position in January is still somewhat of a portfolio hedge.  We could sell some options against this position if we wanted.  The Jan. 30 calls are $2.25 and the Jan. 35 calls are $1.75.  Both of these would give us plenty of premium to collect if we do get another short squeeze rally in this market.  For now I am holding the long Jan. 20 Call naked with a small profit of $0.45 per contract, from buying back the Jan 35 calls from the initial position.

The trick here is giving ourselves enough time to absorb the short term movement and play the medium larger moves.  If I make any adjustments, then I will keep you posted.

Update as of 7/28/2010 10AM

Quite frankly I have not been aggressive enough with this position.  I should have been trading it back and forth these past few weeks playing the ups and down in the market.  We have had a nice run in market and it may continue, but I am going to get a little aggressive here and buy back my short Jan 35 call for $1.25. I sold the call at $2.6 when we did the initial spread.  The other leg of the spread was buying the Jan. 20 Call for $5.6.  This is currently trading for about $3.2 so a loss of $2.4

Overall the position is down $1.05.

If the market turns over and the Jan. 20 Calls gain in value then I will most likely sell another upside call against it.  I may get a little more aggressive on that call I am selling. By this I mean that I may move the call down from the 35 strike to maybe the 30-32 range.  This will depend on the prices at that time.

If the market continues to go higher, I will make the decision of exiting completely with the loss or selling something more aggressive against it like the 28-30 range.  I am letting the market dictate which direction I will play.

Initial Position:

I think the market has been due for a rally, but there seems to be so much bad news out there that it is difficult for anyone to feel confident that our economy is on track. Yesterday, Bernanke danced carefully in front of a Congressional committee.  My favorite line was:”I’m trying to avoid taking sides on this because it’s really up to Congress to make those decisions,” he told Rep. Michael Simpson, R-Idaho.  That was the reason he was there, to give his opinion.  One thing that we can take away from this talk was that the US has to get their debt under control.  We know that is not going to happen.  We are headed down the same road as Greece, but in a much larger global economy.  So what stocks are still the most at risk? Financials.  Read Below to find out how to play one ETF that is only 6% off of it’s lows and $223 from it’s highs.

Banks closings are still happening, even though the media does not cover them.  Analysts are projecting the banks closings to peak in 2010, but we know that can’t be true.  The bank closing will not stop until the housing market gets under control.  The housing market is driving foreclosures.  Banks are not lending and the rate of refinancing for troubled homeowners is not even worth mentioning because it is not even scratching the surface.  Low interest rates should be getting everyone and their cousins to refinance, but bank rules are very tight at this point.  Banks are failing because both commercial and residential real estate are having very high foreclosures.  Even though the banks don’t have to report the Level Three assets ( those hard to quantify), most are having a hard time dealing with the foreclosures.  Most failed banks are costing the FDIC around 25%  of assets of the bank.  Apply that loss to the remaining banks in our nation because that is what these banks are hiding in their level three assets.

Our government has taken away transparency of these banks by hiding the true losses or mark to market under the FASB Rule 157.  This combined with the 25% cost to FDIC makes me very scared that will several more years of bank failures.

One of the easiest ways to play the complete breakdown in the financials is SKF.  This is the Proshares UltraShort. The Yahoo Profile : “The investment seeks daily investment results, which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Financials index.”

To see how we traded it login on right: Details will appear below!

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This ETF has moved up from a low of $16.71 on April 15th.  The high which was around $250 was back on the when the market was making lows in 2009.  We are currently trading around $22. Implied Volatility is slightly high so I would advice placing a vertical spread to offset any drop in IV.

Depending on your excess cash, exposure to financials in your portfolio, or belief in what I wrote above you can vary this vertical.  Those who feel strongly about the direction may not want the vertical spread and may want to make a straight call purchase of a longer term option.

Even with expecting a small pullback on this ETF, we still like buying something at these levels for the longer term.  If all is well in the world then this ETF will go lower, but that is why we will use an option to limit our risk.

With the ETF currently trading at $22.25, the Jan2011 20 Strike calls are trading at $5.60 on the offer.  The Jan2011 35 strike calls are trading at $2.60 on the bid.  If we bought the 20 calls and sold the 35 calls, that would give us a vertical call spread o with maximum gain of $15 less what we paid for the options ( $3.00).  We can make $12, on this trade if it closes above $35 by January expiration 2011 or before.

If the market just goes higher from here and everything gets better and the SKF drops like a rock, then we are out $3 times 100 or $300 for each spread that we put on.  I like this play for three reasons: 1) as insurance against my portfolio, 2)cheap to get into 3) upside potential.

What is the upside potential of this play?

I don’t think we will see the highs of $250 any time soon unless Europe complete collapses.   Recent highs of $27 are quickly attainable though.  The highs before that were around $50, so if the market does start falling apart then you may want to buy back the short Jan 35 call to let this play profit for more then the $12.

If time goes by and nothing happens, then we will revisit this trade and look to exit or roll the position.

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