Tuesday, April 27, 2010
In May 2010 Reg SHO is being updated to impose a temporary version of the old uptick rule that applies when a "circuit breaker" is tripped for a particular security. Starting in May, if a security drops during the day by 10% or more below its most recent closing price, short sellers will not be able to sell short at or below the current best bid price for the security. In other words, people “selling long,” which means selling the shares they own, will have priority and will be able to liquidate their holdings before short sellers can jump onto the pile. As the SEC states in their unique brand of English: a targeted short sale price test restriction will apply the alternative uptick rule for the remainder of the day and the following day if the price of an individual security declines intra-day by 10% or more from the prior day’s closing price for that security. By not allowing short sellers to sell at or below the current national best bid while the circuit breaker is in effect, the short sale price test restriction in Rule 201 will allow long sellers, who will be able to sell at the bid, to sell first in a declining market for a particular security. As the Commission has noted previously in connection with short sale price test restrictions, a goal of such restrictions is to allow long sellers to sell first in a declining market. In addition, by making such bids accessible only by long sellers when a security’s price is undergoing significant downward price pressure, Rule 201 will help to facilitate and maintain stability in the markets and help ensure that they function efficiently. It will also help restore investor confidence during times of substantial uncertainty because, once the circuit breaker has been triggered for a particular security, long sellers will have preferred access to bids for the security, and the security’s continued price decline will more likely be due to long selling and the underlying fundamentals of the issuer, rather than to other factors.
Friday, April 23, 2010
Which of the following option series trades at the highest premium?
A. ABC Apr 30 put
B. ABC Apr 40 put
C. ABC May 45 put
D. ABC Jun 45 put
Okay, it seems there may be information missing. Unfortunately, there isn't. No stock price provided in the question? There's your clue--it can't matter what the stock price is. The test is hard, but it's not a rigged game. If the stock price were required to answer the question, it would be provided. It wasn't provided, so it doesn't matter. Why doesn't it matter? Because puts with higher strike prices are worth more money, period. No matter where the stock is right now, the right to sell it for $45 is worth more than the right to sell it for $40 or $30. So, the answer has to be the May 45 put or the Jun 45 put. Which one gives the buyer more time to win? The Jun 45 put. That's the one that's worth the most.
Wednesday, April 21, 2010
Friday, April 16, 2010
Geeze. If you read the summary, you'll notice that AXA didn't bother to argue--they used AWC (acceptance, waiver, and consent) to settle the matter. On the other hand, I saw that in another case, the respondents appealed the NAC decision to the SEC, and are now appealing the SEC decision to the federal appellate courts.
However, we can only have so much fun with one blog post, and it's time for me to head to the office pretty soon, anyway.
Monday, April 12, 2010
So, what did I learn from my 10-month adventure in margin?
- Being forced to sell stock to pay the margin loan is really stupid. Those 90 shares of Hospira that I sold to pay off the loan would have generated $1,000 in dividends over my holding period and possibly increased in value by 50-100%.
- The real world uses different terminology than the Series 7, but the concepts are exactly the same as what you study for your exam. My account doesn't use the term "SMA," or "debit balance," but you quickly get used to the terms "available funds for trading" and "margin balance."
- I will never use margin again.
My adventure was highly educational, and the $4,000 loan was totally necessary when I took it. But, if you see me blogging about another adventure in margin, please remind me that I no longer engage in that sort of foolishness.
I could borrow $4,790.72 from "SMA" right now with just a few clicks of the mouse, but I won't do it. Just like I won't walk down to the liquor store at the end of the block this evening. Nothing illegal about either activity, but as someone who has experienced both destructive pursuits, I can say with confidence that I'm better off without it.