The XLF position was stop-lossed at 50% loss and closed out. Although the strategy to exploit the wide swings in XLF caused by new developing news events was decent, the execution was poor.  The calls were purchased too early and should have been purchased at lower premiums.  As the VIX spikes above 40 once again, there are tell-tale signs that XLF and the market will have a short term rebound.  Yet, for Ares Trading, the risk exposure to the XLF calls were too much at this time.

The AAPL calls are regaining their value slowly as AAPL stages a rally today.  Although this article is clearly biased, Ares Trading likes the points made by the author supporting AAPL.  As previously stated, Ares Trading expects AAPL to crush their earnings estimates come September 30th, and trade the October calls for a profit as soon as possible.

As a hedge against general market downturn, Ares Trading has established a considerable position long Gold.  Using the GLD ETF, Ares Trading has purchased 2x November 08 Call 95 contracts today at 3.00 a piece.  If the bail out plan finally goes through, the value of the dollar will face a sharp decrease, conversely moeny will be invested in gold, raising the price.  If there is no bailout, the markets will drop further, and panicked money managers will invest in Gold, causing an price rally.  In addition to these fundamental factors, Ares Trading has discovered various technical indicators which hint at a upcoming rally.

Here is the current state of the positions at a a 20% loss:

Ares Trading is bullish on ORCL

The usual suspects are down single digit percentage points: Banks (RKH), Insurance (KIE), Homebuilders (XHB). In this market, it would be prudent to hold on to short contracts in these sectors.  In an inevitable down turn they are usually always hit the hardest.

Ares Trading is short RKH, KIE, XHB

Commodities and Energy are up.  DBC, XLE. The current market activity could be large institutions shifting money around to revised asset allocation strategies after the recent AIG crisis aversion.  The record high oil prices could also be helping the energy and commodities sector.  The dollar is down, gold (GLD) and silver (SLV) are up – the most reliable rule of economics.

Ares Trading initiated a bullish position in AAPL when it was trading down 3.0% intraday, with the purchase of 2x October 08 Call contracts at the 160 strike for $1.58.  Although the contracts are currently down close to 30%, Ares Trading is expecting a strong September 30th, 2008 Earnings Annoucement. The analyst coverage is mixed but Ares Trading believes this position has a low risk/reward ratio because of premium increases from higher volatility.

AAPL trades at above average volumes habitually, especially during earnings season.  AAPL went from 120 to 140 in 1 day.  Ares Trading beleives the new Google phone will not be serious competition for AAPL’s smartphone market share.

Current Positions: Valued at 2:01PM

1.  Creation of a government entity similar to Resolution Trust Corporation during the savings and loan crisis which will buy bad debt and hold it for a period of time. This will allow banks and other financial institutions to take these toxic securities out of their balance sheet.

2.  Ban on short sales of various financial companies at least until the end of the year.  This has already been enacted in Europe.

3.  Create some type of federal insurance plan protecting those invested in American money-market funds.

These rumors have lead to massive gains in the equity futures market.  Globally, Asia and Europe markets responded very well to the news, both markets moving up aggressively.

The panic and fear of liquidity concerns which caused Gold to go up 15% in a few days is now disappearing.  Gold (GLD) will definitely face a trend reversal today but it is too flaky to bet on.  Especially with no official congressional resolution passed, there is no certainty in Gold’s direction over the next few weeks.

The proposed ban on short selling will help lift the financials (XLF) out of their oversold territory.  This is a trading strategy Ares Trading is considering.  In addition, Kraft Foods (KFT) has replaced AIG on the Dow Index.  The stock price has actually rallied the last month and has room to go further.  Ares Trading is long on KFT.

Whole Foods (WFMI) has experienced a huge resurgence in its price.  Ares Trading had attempted to trade October puts on WFMI but was stopped out of the position the next day at a 20% loss.  Whole Foods is owned 95% by institutions and is currently in the accumulation phase by these companies.  Thus, Ares Trading cannot go short against the current momentum, but is still short WFMI medium-long term due to fundamental factors.

The energy index ETF (XLE) is poised to rebound after the recent news of government aid.  The energy market has been highly oversold during the recent sell-off.  Ares Trading has initiated October Calls and will hold them until the end of September, depending on XLF’s movement, to maximize gain.

Chesapeake Energy (CHK) had onced reached a peak of $70/share in July and has seen massive insider buying by its CEO.  Currently trading at $38 and change, $4 above its 52-week low; Ares Trading is long CHK.

The VIX (Fear Index) fell below 35 to 33 at the end of trading Thursday, September 18th.  This could be a sign that the market has bottomed out, or it could signal an upcoming false rally.  Ares Trading views the current market poised to go up in the short term.  However, Ares Trading does see risk of another short term sell-off based on new news and information dealing with financial mergers.

IWM: This is the Russell 2000 Index ETF. Puts were bought and sold in a single day turnover for a profit.  This strategy was used twice to make 45% and 30% returns.  The timing was crucial and profits were taken quickly.  In the current calamity facing the financial markets, shorting indicies is a simple profitable strategy.

IRF and VSH: Interlink (IRF) and Vishay (VSH) were traded in a MnA arbritrage strategy. As discussed in the previous post, VSH had initiated a hostile bid direct to shareholders for IRF at a significant premium.  The strategy was to go long IRF (buying calls) and short VSH (buying puts).  Unfortuneatly IRF urged shareholders not to accept the deal and the bid is still on the table.  Thus IRF declined and the calls lost a significant amount of value.  On the flip side, VSH lost a significant amount since the puts were purchased on 9/11.  They stock price slid about 18% from 9/11 to 9/19 and resulted in a 200% return on the puts.

WFMI: Due to declining discretionary consumer funds and other technical indicators WFMI was trending down. Puts were bought on 9/12 very close to the money.  Within a day the puts were ITM (In The Money).  This position was up 20% but it wasn’t closed.  On 9/15, WFMI started trending up after a high volume gap up in early trading.  The puts were immediately sold and the position closed for a 15% gain.

Ares Trading is satisfied with September’s performance.  The target ROI  was 30% and the goal was attained.  In addition, positions which were losing value fast were stopped adequately.  For the coming month of October the target ROI is going to remain 30%.  Ares Trading will focus largely on index ETFs (DIA, SPY, IWM, QQQQ, XLF, XLE, DBC) and also try to exploit the credit crisis which is sinking the financial sector.

Aside from the sector plays there are a few new individual company ideas.  There is a classic acquisition arbritrage opportunity with International Rectifier (IRF) and Vishay Interntechnology (VSH).  This article in IT world discusses the takeover bid by VSH for IRF.

“Chip maker Vishay Intertechnology Inc. said Wednesday it has raised an all-cash bid to buy to buy power management chip maker International Rectifier Corp. and will take the $1.7 billion offer directly to shareholders.”

VSH doesn’t want IRF, it needs IRF in order to remain competitive in the semiconductor industry.  Thus, it is raising their bid and going hostile in order to takeover IRF.  This presents the classic opportunity to short the company that is buying (VSH, since their cash levels will drop and they will face integration costs with the new company), and long the company being bought (IRF, since they will be bought at a premium).  Obviously, this strategy doesn’t always work but in this scenario Ares Trading believes the play will be profitable.  (As of 9/12/2008, 10:45AM, IRF is up ~2%, and VSH is down 5%)

Another position has been initiated in Whole Foods (WFMI).  Ares Trading believes Whole Foods will decline due to lowered consumer discretionary income.  In addition WFMI has fallen ~30% for the last 3 months.  The in-the-money put contracts were purchased when WFMI was up 1.5% for October expiration.

Here are the positions for September.  Profits have already been taken from trading the IWM (Russell Index).

Unfortunately, the DBC Commodity has tanked and the calls have lost nearly all their value.  This has been caused by the dropping oil and natural gas prices, who knew a correction was due?  Actually, Ares Trading had heard some speculation of a commodities correction but didn’t consider it valid.  The good news is the overall monthly positions are close to even at -0.23%.  There is about a week and a half on the DBC calls, hopefully they will regain some of their value.  This wouldn’t be too surprising especially with Russia’s assault against Georgia, which will cause oil supply issues due to pipeline problems.

New positions will be initiated after expiration Friday on August 22nd.

The following positions were closed and will be discussed in order: DIA, F, QQQQ, XLF

DIA: The Dow Jones Industrial Average dropped on Monday, creating 50% profit for the put position.  However, the order wasn’t made before the close of the market.  On Tuesday morning the contract was sold for 46% profit before the rally started.  This was an example of great timing.

F: Monday’s drop in the Dow Jones Average affected Ford’s shares as well.  These put contracts were trading at around 40% premium, however the order did not make it before the close of the Monday market session.  Similar to the DIA position, these contracts were sold for 32% profit Tuesday morning, before the rally.  Another example of great timing.

QQQQ: The Nasdaq index rallied on Tuesday as well, ending up 2.45%.  This position was opened at a time when these call contracts were overpriced due to volatility.  Thus, even with a dramatic increase in price the contracts only sold for 9% profit.

XLF: This position was sold at the wrong time, an example of BAD timing.  The call contracts were down around 40% the day before.  Ares Trading played conservatively and cut losses short at 17%  in the morning, as XLF began its rally.  Ares Trading did not have faith in the upward momentum.  As the financial sector rallied with the overall market, the contract increased in value.  If these contracts were sold at the end of Tuesday instead of the beginning, they would have sold for $1.86, resulting in 5% profit.