4 Responses to “Bailout schmailout. This is it. We’re toast.”

1. Bjorn
   October 3rd, 2008 at 3:52 pm

   

   So, the House passed the bailout, and the DOW closes down 158 points or so. That sure tells a tale. Your data on the credit contraction adds to the nightmare scenario.

   I’m curious if your study of the OCC document gave you any added confidence in using LEAPS Options. I looked at it and did not glean too much.

2. Mike
   October 3rd, 2008 at 4:40 pm

   

   No, I was unable to assess what their reserve cushion really means in terms of collateral percentage relative to the underlying assets.

   One thing that does give me confidence is that John Hussman, for whom I have a lot of respect, relies heavily on options to hedge his Strategic Growth Fund, which is always 100% in stocks but lately fully hedged. He said in an old market comment that he sometimes gets doomsday questions about the OCC but that he doesn’t worry about it because of their protections.

   Here is the post:
   http://www.hussmanfunds.com/wmc/wmc050418.htm

   And here is the relevant excerpt:

   “It’s important to recognize that the options market has operated very well during panics, including October 1987, and in numerous instances since. Still, because I occasionally receive “doomsday” questions about the markets, I’ve included some institutional details and my own views here. All of the options used by the Hussman Funds are exchange traded and backed by the Options Clearing Corporation (OCC). The OCC is in turn backed by the creditworthiness of its Clearing Members (major U.S. financial institutions) and carries a lien on securities, margin deposits and funds maintained in Clearing Members accounts to the extent specified in the OCC’s rules (see http://www.optionclearing.com for details). The OCC requires margin deposits by its Clearing Members, and carries a separate Clearing Fund. While various financial institutions may, on their own, face risks related to their own option positions or over-the-counter option exposures, I believe that an OCC default is highly improbable, as is a failure relating to exchange-traded options. Even if an OCC default were to occur, and neither the Federal Reserve nor other financial institutions were willing or able to ensure its solvency, the potential loss to the Hussman Funds would be limited to the extent that the Fund’s options were “in-the-money,” which rarely represents more than a few percent of Fund value.”

   I emailed him this week asking for more details and whether he thought CDS threatened the system. No answer yet.

   My own solution is to just build cash as the market falls. With each successive low, I become less exposed to these risks. One way or another the markets as we have known them are ceasing to exist.

3. Bjorn
   October 10th, 2008 at 12:56 pm

   

   A few days ago you quoted from hussmanfunds.com. It included the following:
   “While various financial institutions may, on their own, face risks related to their own option positions or over-the-counter option exposures, I believe that an OCC default is highly improbable, as is a failure relating to exchange-traded options.”

   Did this change your mind about the safety of being in, say, ProShares Inverse ETF’s?
   Or, are you still planning to pull out of them and avoid them for now?

4. Mike
   October 10th, 2008 at 1:02 pm

   

   Hi Bjorn. I got out of the rest of those the week after the short-sale ban. I am all puts now, and closing positions every day. I will stay short through the bounce, when it comes, with a great number of 2010 puts.