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December 12. Unique shorting opportunity.

December 12. Unique shorting opportunity.

The market is going down. We are looking at a credit crunch recession.

Particularly implementation of the November 15. 2007 Financial Accounting Standards Board will give the market a big hit. This will happen in January, I expect massive write offs in January bringing the market south, as I said in this article on LewRockwell.com:

http://www.lewrockwell.com/orig8/lysglimt1.html

On December 11 the FED will meet and it is widely expected that they will cut rates by 0.25%. I am not quite sure they will, but let’s assume they do. That will give us a rally. Remember that the ruling sentiment on Wall Street is still greed. Fear has yet to take over, fear will rule in due time, but for now the market is greedy and willing to bite on any lure that wiggles. The FED’s 0.25% rate drop will give us a rally on December 11 and December 12.

Put options on the broad market always get cheap when there is a bull run. The likelihood of the market going down is perceived as lower and the spread is lowered.

This gives us a unique opportunity for a short term gain. Buy put options on December 12 and sell them in mid January when the bad news have started hitting the market.

Right now I particularly like shorting the Swedish stock market. Swedish industry is very much dependent on exports in dollars. The USD has fallen against the Swedish Krona SEK lately, the USD/SEK exchange rate has fallen from 7 to 6.33 in just the last three months. That’s 10%, and that’s going to hurt earnings in USD while having cost base in SEK. It will eat up profits.

http://chart.ecovision.se/scripts/chart.dll?profile=1600&methods=0&yscalechangepercent=1&forcetimescale=1&curveStyle=1&curveWidth=2&width=615&height=150&id=Z36&name=SEK%2fUSD&mode=0&days=0&startdate=2007-08-18&enddate=2007-11-18

The Swedish stock market follows New York closely, a fall in New York will bring fall in Sweden.

These are the companies in the OMX 30. A lot of export oriented industry and banks. Exports will hurt from the falling USD, banks will hurt from direct losses and a general fear of the sector.

http://www.omxgroup.com/nordicexchange/priceinformation/indexes/Microsite_Index/?InstrumentId=SSESE0000337842

Therese are the available options on the fairly broad OMX 30 index in Stockholm:

http://www.omxgroup.com/nordicexchange/priceinformation/microsite/Options_and_Futures_Index/?InstrumentId=SSESE0000337842

These are the put options:


http://www.omxgroup.com/nordicexchange/priceinformation/microsite/Options_and_Futures_Index/?InstrumentId=SSESE0000337842

Wednesday November 21 the OMX 30 is at 1060. Swedish investors, like all, are a sheep heard, they will continue selling. By December 12 I expect the market to have continued falling a bit, but lets assume the market bounces back to today’s level.

The put option to look for is therefore one that is just about in the money at that level.

I like OMXS308M1100, it has the highest volume of outstanding contracts in this group, 3045+ contracts today. Its expiry date is January 25, 2007, a Friday. This contract will still have time value in it the Friday before on January 18, that’s the time to sell it. Say the market bounces back to today’s level on the FED rate cut, you should then be able to buy this put option at about the same level as now.

This option (OMXS308M1100) last price is SEK 71, I have been buying it since much lower. That is the price to remember and compare my suggestion to. Check it back December 12 and on Friday January 18, 2008 to compare.

By the second week in January (January 7-12) the bad news has started flooding the market, losses after massive losses. The next week the losses will continue. Everyone will realize that there is much much more bade news to come. The sentiment might even have turned from greed to fear. So on Friday January 18 the blood will be in the streets. I expect massive sell offs on Wall Street that will go over to Stockholm. A fall of 5% makes you sure money, 10% is not unlikely, perhaps the market even might fall by 20%.

Now, you can start buying this option now. Put yourself just a little bit above the market makers bid price, and you will pick up any contracts being sold. Be careful about paying the ask price as the spread is 5%+.

The moment to heavily buy this option is December 11 and December 12, in the bull rally. If the market sentiment turns strongly bullish these few days you might get this contract at bargain prices.

If then the market falls by more than 5% over Christmas, New Year and into the news year this option will soar.

There you have it, have fun.

Oslo, November 21, 2007.

Hans Lysglimt
Publisher
Farmann
www.farmann.no


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