Friday, July 25, 2008

New ways to Naked Short Sell

Mike Shedlock has a couple of good articles discussing Washinton Mutual and the apparent risk large depositors are taking when they have deposits in excess of FDIC insurance. In these articles Mish happens to mention a couple of ways to effectively place a short bet on stock without borrowing any.
First is
Unusual PUT Activity

My friend AJ alerted me of unusual PUT activity on Washington Mutual on Thursday.

AJ Writes: "Someone thinks WM is going under. 35,000 Aug. put contracts traded at the 3 strike today, and 12,000 Sept. PUT contracts at the same strike. Both dwarfed open interest, so they're mostly new positions. This reminds me of activity in Bear Stearns in March."

Here is a dynamic table of options on WaMu.

click on chart for sharper image

In case you are not familiar with the term, PUT buyers are betting on or protecting against share price declines. This is heavy activity at the strike discussed. The above table is from Thursday.
So one way to get short a stock is to buy puts. Also sell calls.

The second method for getting short;
Washington Mutual debt protection costs jump

Action in Credit Default Swaps (CDS) show a large as well as increasing chance of bankruptcy at WaMu. Reuters is reporting Washington Mutual debt protection costs jump .
Credit protection costs on Washington Mutual rose sharply on Friday, a day after an analyst said some creditors reduced their exposure to the largest U.S. savings and loan.

The cost of protecting [$10 million of] Washington Mutual's debt for five years rose to $1.85 million on an upfront basis, plus $500,000 in annual premiums, up from about $1.35 million plus $500,000 annually on Thursday, according to a trader.
Not Just WaMu

By the way, I am not just talking about WaMu here. Any bank whose share price is in the single digits is at extreme risk. Any bank whose share price is under $5 is at risk of imploding overnight.
The second article is here and continues the discussion from the first article.

No comments: