Wednesday, January 13, 2010

Updates on the out-of-the-money put basket

I've been a little swamped today putting the finishing touches on Portfolio Armor, but here are a few quick updates on my put basket. Recall that in a post at the end of last year ("New short position: UAUA") I wrote,

With the Nasdaq near a 14-month high, and the VIX near a 14-month low, I have been building a basket of out-of-the-market puts on financially-distressed stocks drawn from Short Screen's screener1. Today's addition to this basket are the $6 strike, JUN 10 puts on United Airlines parent UAL Corporation (Nasdaq: UAUA), UALRK.X. I bought a few of these today at $0.40.

Those puts are now trading at $0.35 -- they dropped 12% last week a day before a report from Continental broke that moved the underlying stock higher1. UAUA was up ~10% today, but not enough to move my out-of-the-money puts again.

Virgin Media, another company in the put basket, priced a junk bond offering today. I wonder if some income-oriented investors are going to pick up long-dated puts on VMED now, with the intent of buying its junk bonds after the credit markets tighten and yields rise.

I mentioned this on Short Screen earlier, but I added a few out-of-the-money JUN 10 puts on TBSI to the basket today.

1Andy Swan has described options as the "'tells' of the underlying".

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