SEVERAL CENTRAL BANKS CUT RATES SHARPLY
October 8th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
I was in the market yesterday, as the Dow was continuing to tank. I was looking to buy October call options on DIA, strike 115. In English, as the Dow was tanking, I was looking to make a very high risk, high reward bet that the Dow would rise sharply over the next several days.
I never pay the ask on options. The spread was .06 x .09. So I sent in a limit order for .07, which put me on top of the bid. I went to bed. When I woke up, I checked to see if I got filled. I saw that the Dow declined further and sharply from where I entered my order for those calls.
“Oh goody, I got filled for sure,” I thought.
I logged into TradeKing and saw that, not only did I not get hit, but those options had increased in value as the market tanked!
INCREASED.
The moral of the story: When you smell a rat, pay the ask.
There are a couple of explanations of why the premium on those calls increased as the Dow declined. The first one is simply that people knew emergency rate cuts were hours away and were looking for a cheap way to be up wind when the fire started. Another explanation is that black box systems started making very long shot bets the other way as the downside move became more extreme.
Anyway, it will be interesting to watch those 115s from here.
Via: Reuters:
The Federal Reserve led a global round of emergency interest rate cuts Wednesday in an effort to contain the worst financial crisis since the 1930s.
The Fed said it was cutting its key federal funds rate by 50 basis points to 1.5 percent. China, the European Central Bank (ECB) and central banks in Britain, Canada, Sweden and Switzerland also cut rates in the coordinated response which analysts had been demanding.
“Incoming economic data suggests that the pace of economic activity has slowed markedly in recent months,” the Fed said in a statement.
“Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”
World stock markets cut heavy losses after the move.
The dollar fell further versus major currencies and U.S. Treasuries rose. German government bond futures wiped out gains, while European bank shares turned positive.
This really demonstrates the level of desperation the elites are starting to feel. The rate of real inflation is at least 6%, maybe even as high as 10%, so a 1.5% interest rate at this point is pretty much running the printing presses in the mint full-tilt and giving the resulting cash away!
I appreciate the “one that got away” stories, myself…I was always too proud to take the ask.
But maybe that’s not a bad thing. I don’t know…I find this piss-poor response to the coodinated rate-cut pretty freakin’ scary. At ther very least the PPT should have been out there juicing things with all they’ve got left.
And I think you have to wonder whether maybe that’s the point: they’ve got nothing left. Trillion-dollar bailouts didn’t hold things up, and this coordinated rate stunt is a one-trick pony (the LAST thing they could do is cut again anytime soon, that would signal that things were completely out of hand). I remember Greenspan’s surprise rate-increase in 1998 or so, when they were trying to hold back the tide of the “Asian Contagion” — I was completely short, then, wham, the second the bond-market closed there was Breaking News, 1/2-point increase or whatever, the Dow paused for all of about 4 seconds and then took-off like a rocket. I don’t think it’s at all encouraging to see that this major global Central Bank rate stunt isn’t convincing anyone.
I’m not a betting man anymore, but at this point I’d lay in a few deep out of the money puts before today’s close. My gut instinct (disclaimer: my gut instinct is next to worthless) says things are perfectly set-up for a complete pants-shitter over the next 2 or 3 trading days — free-fall, trading-curbs, 1,000pts down, full market “holiday” action.
I won’t bet on this myself, nor do I recommend anybody else to…but if you happen to own a bar along Wall Street you could probably do worse than call your next liquor-order in right away. It might get awfully busy soon.
Holy cow, even while I was typing that things turned over.
This is going to be a catastrophe.