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MV Sports Report: Bears Admire Size of Bulls' Muscles


Rain or shine, we reivew the day's biggest stock stories.


Everyone is looking for a 10% correction but there is a slight problem. The bears just can't keep the market down. Today was their best shot as there was selling pressure early but once the dollar fell, the market shot up (see Mr. Practical's thoughts on the dollar).

For the day, the S&P closed higher by 0.28% to 1030 well off the low of the day of 1016. There wasn't a ton of action in the index but it was impressive the market managed to close higher after what looked like a trend down was in the making.

Today on the Buzz and Banter Jeff Cooper gave his thoughts on the S&P.

"A 30 minute chart of the S&P shows a perfect Gapfill at 1016 and on a stab down into the first hour. Often times the market will make a first hour spike low or high and then either reverse in earnest or test the other end of the range and give a false ORB (an opening range breakout) to the other side of the initial spike.

"If the S&P extends above 1032 and holds, it projects to 1044 and a new swing high for the move."

The most interesting movement today was in the near bankrupt stocks as they made explosive moves higher: Fannie Mae (FNM) 4.32%, Freddie Mac (FRE) 10.34%, Citigroup (C) 9.07%, and AIG (AIG) 29.93%. Citigroup was most likely up because of news reports that superstar investor John Paulson had taking a 2% stake in the company. While the other three were just giant short squeezes, the action is still quite interesting.

Minyanville Professor Steve Smith gave his thoughts on AIG on today's Buzz and Banter.

"The stock has become nearly impossible to borrow which means that people need to turn to the options market to both protect and initiate short positions. Even if you can borrow shares of AIG it is costing nearly 30% annualized rate to short the shares. Option traders are now bidding up puts and calls to both try to capture expectations of more volatility. Volume in the September options, in which several strikes above the $45 level have just been added today, is running 7x the daily average.

"This cost of carry gets translated into higher premiums for the options. The implied volatility of AIG options has jumped to 125% from 95% just one week ago. This is also now a small premium to the 30-day historical volatility. Fort the past five months the IV had been at a discount to the stock's HV so option prices are now relatively expensive.

"One way to take advantage of this spike in price and implied volatility would be to establish positions for a net credit. But given that this stock is such a state of flux it makes sense to be hedged. One way to go might be to sell iron condors or even sell calendar spreads, both of which limit the potential loss but benefit from a decline in implied volatility."

AIG is too risky for me and Steve Smith but for those who like to take excessive risk can try his strategy (also see Minyanville Professor Adam Warner's comments from his blog).

Tonight's Thirsty Thursday, enjoy and have a great night!

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Position in C

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