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Is Joy Global about to tank really bad?

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June 01, 2010 – Comments (13) | RELATED TICKERS: JOY

That question is very near and dear to my heart, since I've sold several puts on them recently, and if it tanks 15% or more in the next 15 days or so, I'm sunk. I thought the premiums were irresistible on the Jun 10 44 puts: more than 2% of strike for options about 13% otm, and that expire in... 17 days! That's a hell of a lot of implied volatility or whatever. If it sheds, say, 10% of its market cap, and it takes 18 long days to do it, I've pocketed the whole premium. Same if it stays level or skyrockets. For it to be unprofitable at the time of expiration, the stock has to be about 13% lower then.

A second problem arises, however, if it drops most of the 13% in less than a week. Then the options are going to show a paper loss, even if it never makes it down the rest of the 13%. I might be able to average down on the position, but my broker might increase the margin requirement for the puts because of the volatility: I might even be subject to liquidation and defeat without the 13% drop ever materializing.

Still, I thought it was a fair risk. I'm in.

13 Comments – Post Your Own

#1) On June 01, 2010 at 2:35 PM, FleaBagger (29.74) wrote:

Perhaps I should point out that the last time I thought puts were really juicy on a stock I liked, I got hammered.

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#2) On June 01, 2010 at 3:22 PM, FleaBagger (29.74) wrote:

I've already lost more than 10% on my position: the puts are now going for 1.20.

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#3) On June 01, 2010 at 3:59 PM, guiron (20.22) wrote:

It's much easier to do this if you have a defined limit to your desired level of risk. Holding onto a losing position is difficult unless you decide how much you can afford to lose and set a limit. On the other hand, you can also use vertical spreads if you have a directional trade, and you want to make sure it doesn't cost you too much if it goes against you. I almost never go long or short a single option position anymore unless something comes up that looks like a really easy day trade - don't like to hold onto them, because they can deteriorate quickly with time and changes in vol. You could always buy a put at a different strike and make it a spread. You might want to wait until volatility drops a little.

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#4) On June 01, 2010 at 4:15 PM, guiron (20.22) wrote:

BTW, as you probably know, buying an equal number of puts also means you have protection if you get put the stock, because you can sell them at the strike of the puts you're long. So, the spread is really what you lose if that happens, plus commissions and fees. However, getting put the stock even with long puts may trigger a margin call anyway, depending on the broker, etc.

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#5) On June 01, 2010 at 7:40 PM, XMFSinchiruna (27.47) wrote:

fleabagger,

You're buying on margin?????????????????

I figured that would have become one of the few welcome outcomes of this whole crisis ... that at least investors would take the opportunity to deleverage their trading practices.

Although I cover JOYG for the Fool, and feel I have amassed considerable insight into the company's prospects, as a matter of principle I simply can not offer my thoughts about the near-term outlook for shares when I know that the question relates to a margin-funded trade. 

Sorry for the rebuff, but I am vehemently opposed to the practice of trading on margin. Thank you for not taking it personally, and for understanding that it is for me a question of principle. I don't stand in judgement, but rather withhold my opinion to punctuate the intensity with which I consider margin trading a singular threat to the financial well-being of those who employ it. Please know that I continue to wish the best for your own personal outcome, and hope that you may perhaps reconsider the wisdom of trading on debt in the midst of a global debt crisis.

Best of luck,

Sinch

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#6) On June 02, 2010 at 8:18 AM, Superdrol (97.40) wrote:

next time you do this, you should hedge your position esp when you are shorting puts outright on a cyclical company like Joy Global. 

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#7) On June 02, 2010 at 1:35 PM, FleaBagger (29.74) wrote:

Sinchy - maybe you feel this is a "distinction without a difference," as a friend of mine says, but I am not buying on margin: quite the contrary, I am piling up cash by selling puts. No matter how much cash or how little the combined strikes of my positions of short puts, my broker calls this a margin transaction. 

Of course, in this case, I've been irresponsible and sold more puts than I can cover with cash, but they're expiring in 17 days - 16 now. That's a pretty huge time decay rate. I couldn't pass that up. I'm weak. There's no "cash covered/only margin covered" boundary at my broker. It's not my fault that I behave the way I do. Somebody bail me out!!!!

Just kidding. I'm a single guy, I'm prepared, if the market turns against me, to lose all my money; I don't have a wife or kids for it to hurt. I'm sorry that my debt offends you. Maybe someday I'll be able to capitalize all my investments without debt. Maybe I'll go broke a few times on margin calls in the meantime. For the moment, I just need to do things my way.  

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#8) On June 02, 2010 at 3:13 PM, Superdrol (97.40) wrote:

haha.  You got the biggest gift today.  Didn't joy global get upgraded ?

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#9) On June 02, 2010 at 3:23 PM, FleaBagger (29.74) wrote:

Superdrol - I guess I did. Of course, GS may just be trying to trick us into giving them a better entry point on a short position. Haven't they been saying the diametric opposite of what they think every single time they speak for the last 10+ years?

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#10) On June 02, 2010 at 4:15 PM, Superdrol (97.40) wrote:

haha.  that could be true as well.  Or Goldman Sachs could have given their clients who are 'long' a higher sell price.

 

 

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#11) On June 03, 2010 at 9:02 AM, FleaBagger (29.74) wrote:

Superdrol - that would be if their hedge fund clients were long. I guess if their pension fund clients were long, their hedge fund clients and proprietary traders would short it and manipulate the stock downward.

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#12) On June 03, 2010 at 9:05 AM, Superdrol (97.40) wrote:

too much thinking.  just worry about the price action.  people lie, charts don't.

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#13) On June 04, 2010 at 1:01 AM, FleaBagger (29.74) wrote:

Superdrol - I'm not very droll. I was just trying to be funny, and apparently it wasn't working at all.

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