Monday, July 23, 2007

Just a Good Ole Boy

If I was a betting man, the trade here is to fade the flight to quality. Maybe get long some closed end hi yield funds which are at 52 week lows, and short treasury ETF's. The flight to safety is a lot like out of the money put buyers after they have taken a hit. Sure it lets you sleep at night, but you are locking into a bad position usually. This was a pattern that I saw in the merger arbitrage game. When no one needed puts, they were cheap to own. Once the proverbial shyte hit the fan, the out of the moneys would trade at ridiculous prices. For example, back in early 2001, GE was trying to buy HON. With GE trading around 50, the deal was worth 52.5 for HON share holders. The spread, where HON actually traded, was 2.50 or 50 for HON. The 40 puts were trading at $.80. Guess where the stock opened after the EU slammed the deal? Thats right, 39. No real protection, but you had to own them.

2 comments:

Keith Berger said...

That reads like someone took the Magnetic Poetry Financial Edition and let a five-year-old go nuts with it on the front of the fridge.

Except none of the words are upside-down.

Eric P. said...

Thats what happens when I let Abigal write my blog.