Last night the SEC put a ban on short-selling 799 financial companies. Read the Official Release Here (PDF).

From my understanding, here is the SEC’s reasoning behind banning short-sells:

Due to a horrible real estate market more people are foreclosing on their homes. This has had a tremendous ripple effect. We have seen financial stocks lose a ton of value.

As traders noticed the uncertainty in the financial markets they freaked out. When people freak out, panic rules the stock market, not fundamentals. Short sellers take advantage of the sell off by selling stocks they don’t own. This causes the stock to lose even more value.

To put a halt on this, the SEC ruled to freeze short selling on 799 companies. This freeze will allow the market to stabilize and THEN they’ll turn short-selling back on.

Although the move by the SEC to ban short-selling has had a positive effect on the market (up over 1,000 points in 2 days), it also comes with some horrible side affects or at least some BIG questions.

1. Short-sellers make money by realizing that stocks are over-valued. If they aren’t in the game, the stocks could be WAY over-valued. What is the real value?
2. When you re-initiate short-selling, there is no guarantee that the market has stabilized. What happens when you allow short-selling?

My Predictions

1. Although short-selling is due to start again on October 2, 2008, it will be extended due to the political effects of a down market (It looks bad on the president if the economy is in the gutter).
2. Stocks will rally and continue to rally until short-selling is allowed again.
3. When short-selling is turned back on… we will see a major sell-off.

Due to surge in stock prices, options have become a very popular investment strategy. View my “Options” post here.

Personally, I can’t wait for short-selling to be allowed again… I’m going to be short a ton that day… I’ve already got my shopping list ready.

Here is a guy that keeps track of the latest spam stocks…. it’s pretty neat and shows you have horrible these companies have been performing. Out of the 35+ stocks that have been sent to him, only one has actually been a winner. You can get better odds at Vegas.

http://www.spamstocktracker.com/

Any company that thinks trying to spam “the hottest company on Wall Street”, is bound for failure, under poor management, and should be shorted as soon as possible.

Dear Publicly Traded Companies:

It is a bad idea to send Spam to potential investors.

Your friend,
The Common Internet User

For instance, let’s say you buy 100 shares of NT and it’s trading at $3.21 and you write a covered call for December at a strike price of $4.00. If you are more than happy to sell at $4.00 and you don’t think it will ever get exercised… now’s the time to write a covered call.

1. You get the premium (let’s say $250) and get to keep the premium regardless of what happens.
2. Remember, you wrote it at $4.00, giving anyone who purchased a call the “option” to purchase the stock at $4.00.
• If it get’s to $4.50
1. You get to keep the $250 and you sell your stock at $4.00 giving you a gross of $400 + $250. And a net sell of $650 – $321 = $291.
• If it get’s to $3.00
  1. You get to keep the $250 and they never buy your stock… But it doesn’t matter… you sell it as a market order anyways

Worst Case Scenario: The stock tanks to $1.00 and you get to keep the premium but it doesn’t even begin to offset the loss

When buying or selling options you have four choices stated below:

Buy to Open
Buy Calls to Open is the right to purchase a fixed number of shares, at a fixed price, before a specified date in the future from the seller (writer) of the option.
You would choose this option if you are looking to purchase an option. For instance, you think MSFT (currently trading at 25) will go to 30, so you go and buy the MSFT option using this buy to open option and hope to hit 30. In this case, you would “buy to open” a “call” and the price you would pay would be the “ask”.

Buy Puts to Open is the right to sell a fixed number of shares, at a fixed price, before a specified date in the future to the seller (writer) of the option.
You would also choose this option if you are looking to sell an option tha tyou think will go down. For instance, you think MSFT (currently trading at 25) will go to 20. So, you go and buy the MSFT option using this buy to open option and hope to hit 20. In this case, you would “buy to open” a “put” and the price you would pay would be the “ask”.

Sell to Open

Sell Calls to Open create an option position whereby the seller (writer) would receive premium income from the buyer in exchange for the obligation to sell/deliver a fixed number of shares, at a fixed price, for a specified amount of time to the buyer. You can only sell calls as an opening contract if the stock is long/purchased in the account before the sell.
You would also choose this option if you are looking to sell an option that you think will go down or stay the same. For instance, you currently own MSFT and it is currently trading at 25. You don’t think it will get to 30. So, you write an option and recieve a premium. Then, you hope it doesn’t get to that price. So, you go and write the MSFT option using this sell to open option and hope it stays the same or drops. In this case, you would “sellto open” a “call” and the price you would be asking for the “ask” price.

Sell to Open Puts create an option position whereby the seller (writer) would receive premium income from the buyer in exchange for the obligation to buy/receive a fixed number of shares, at a fixed price, for specified amount of time to the buyer.
You would also choose this option if you are looking to get a premium by promising a stock owner that you will buy shares at a specific price. For instance, you get paid a premium of $50, but the owner of the stock says, if the stock drops to 20, you have to pay me 25. Then, you hope it doesn’t get at or below 20. In this case, you would “sellto open” a “put” and the price you would be asking for the “bid” price.

Buy to Close
Buy a Call to Close will close out, terminate or offset the initial open contracts to the extent of the number of contracts closed out.
Note: Scottrade does not allow buying puts to close, because we do not allow selling puts as an opening transaction.

Sell to Close
Sell a Call to Close will close out, terminate or offset the initial open contracts to the extent of the number of contracts closed out.

I’ve also learned something else, if you want to execute the option before the expiration date, you can do so at anytime. Remember, a call option is the right to purchase a set amount of stocks on or before a specific date. But, you cannot place a “limit order” for a purchase price. For instance, here is an email that I sent and recieved from Scottrade.

—–Original Message—–
From: Scottrade Customer Support [mailto:support@scottrade.com]
Sent: Tuesday, June 07, 2005 6:28 PM
To: RJ Martino
Subject: RE: Acct: 53938090

Dear Mr. Martino,

Thank you for your email. Options cannot be exercised online. If you wish to exercise an option, you must contact your local branch office with your exercise request. There is no system to set your options to exercise when the underlying security reaches a particular price. The previous email reply was assuming that you wanted to sell your option contracts themselves, not exercise them.

Please let us know if you have any additional questions or comments.

Sincerely,
Kevin Kohler
National Service Center Broker

Scottrade, Inc.
Scottrade has been named Highest in Investor Satisfaction With Online Trading Services Five Times in a Row by J.D. Power and Associates. For award information, visit www.jdpower.com.

—–Original Message—–
From: RJ Martino [mailto:rjmartino@iprovonline.com]
Sent: Tuesday, June 07, 2005 5:14 PM
To: Scottrade Customer Support
Subject: RE: Acct: 53938090

I understand limit orders but I want to know how I can set a limit order to “execute” my options contract.

I want to execute one contract (.XECFH) if XEC reaches $42.00. How would I do that?

RJ Martino [rjmartino@iprovonline.com]
iProv, LLC [www.iProvOnline.com]
ETAS 551
2801 South University Avenue
Little Rock, AR 72204
ph. (501) 683-7229

So, I’ve purchased a stock option of JP Morgan (JPM) for $37.50. The option was an order for 1 contract (100 shares) and the order price was $0.15 per contract ($15.00 for the 100 shares) plus commission. All options are exercisable until the third Friday of the month. I purchased mine to expire on the third Friday of June… June 17, 2005. That means if the stock gets to $45.00 I can purchase the shares at a discounted rate of $37.50.

To make this purchase I:

1. Went to my online broker and chose “Buy to Open”
2. Chose the number of contract I wanted to purchase (1 contract = 100 shares)
3. looked up the symbol for the exercise price and expiration date that I wanted
4. chose a limit order
5. gave the limit price that I was willing to pay for the contract
6. Chose the duration to be “Good until Cancelled”

It was actually quite simple. Now, I just have to make sure that the stock price rises past the actual break even point (all expenses divided by 100). My break even point is calculated by looking at all of my expenses.

Cost to purchase the option: $15.00
Cost of commission for purchasing the option: $8.25
Cost to Buy the entire contract: $3750.00 (exercise price * shares)
Cost of commission to buy the entire contract: $7.00
Cost to sell the entire contract: $7.00
—————————–
Total expenses of: $3787.25

Meaning that to break even, the stock must raise above $37.88.

The other option that I purchased was an option to buy Cimarex Energy for $40.00 before the end of the third Friday of June. I purchased one contract for $0.25 per share and total expenses will exceed $4047. So to break even, the stock must rise above $40.48.

Now, we did our research, chose our best players, and set them in the market. We can now hope the market treats them good! We’ll see in a month.

Sony (SNE $37.70) – with the release of PS3 in Spring of 2006, the anticipation will keep rising until the release. The hype will rise and the first day sales will blow MS Xbox out of the water! Additionally, the demand for the Sony Portables continues to grow. Currently trading at 37.70, I truly expect this stock to raise to around $43 by the end of the first quarter in 2006.

Cimarex Energy (XEC $37.90) – this company is waiting for an acquisition to close. After the acquisition, Cimarex should be at the top of their game and an immediate increase. has been toying with a merger. I’m expecting the price of the stock to run toward $42.00 directly after the disclosure of the amount.

JP Morgan (JPM $35.80) – this company has been plagued by the market’s lack of faith in the merger between JP and Bank One. Although, there has been limited information released on this merger, a report I recently read from thestreet.com states that earnings could grow in the neighborhood of 20% in 2006!

Although the Sony P3 looks promising, I think the stock price may be overvalued as of today (according to some formulas that I recently ran using VectorVest.com).