OptionStation Pro: Position Graphs

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Closing out the trading day with jazz trumpeter Herb Alpert



Nice way to close out the trading day.  Feel like a giant vacuum cleaner, grabbing all the profits from my options trades (covered calls and credit spreads).  

Bon weekend!

One of My MBA Students Explains Covered Calls to a Teenager


One of the favorite topics in my energy trading classes is the Covered Call Options strategy.  Well, maybe it's just one of my favorites and my poor students don't have much say in the matter.  They have to like it if they want to pass my class. LOL!  

Anyway, I asked them to explain the risks and benefits of a covered call option strategy to a teenager.  Here's how MBA student Arjun Sreekumar breaks it down. 

Arjun: Hey kid. A covered call strategy is a great way to make money. Basically, you’re buying a stock – also known as going long a stock – and simultaneously writing a call – also known as selling a call option, or shorting a call. Now a call option is the right but not the obligation to buy a stock in the future.

Teenager: What are the benefits and risks of a covered call strategy?

Arjun: The main benefit of writing covered calls is that it is an income-generating strategy. Think of it like this: the exchange is paying you money to hold onto a stock that you already own. A covered call strategy will work well if the price of the underlying asset rises slightly or stays the same. While you can have heavy losses from writing covered calls if the price of the underlying falls significantly, the maximum gain can also be very high. The maximum gain will basically be the premium collected plus the difference between the strike price and the stock price.

Teenager: Can I write covered calls in my Roth IRA?

Arjun: Yes, you can. And the huge advantage of writing covered calls in a retirement account as opposed to a traditional account is that when you retire at the age of 60 or whatever, you can take out your profits from covered call writing tax free. That means Uncle Sam won’t touch a penny!

Teenager: Gee thanks, Arjun! I’m gonna go watch MTV and sit in my room and complain about life now.

Arjun: Stay in school, kid!

Huffington Post: Wall Street Derivatives Bailout?

Source:  The Market Oracle



by Zach Carter

Huffington Post


WASHINGTON -- Wall Street lobbyists are trying to secure taxpayer backing for many derivatives trades as part of budget talks to avert a government shutdown.

According to multiple Democratic sources, banks are pushing hard to include the controversial provision in funding legislation that would keep the government operating after Dec. 11. Top negotiators in the House are taking the derivatives provision seriously, and may include it in the final bill, the sources said.

The bank perks are not a traditional budget item. They would allow financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp. -- potentially putting taxpayers on the hook for losses caused by the risky contracts. Big Wall Street banks had typically traded derivatives from these FDIC-backed units, but the 2010 Dodd-Frank financial reform law required them to move many of the transactions to other subsidiaries that are not insured by taxpayers.

Please read more here.

Trading Report: 5 U.S. Banks Each Have $40+ TRILLION In Derivatives Exposure


by Michael Snyder

When is the U.S. banking system going to crash?  I can sum it up in three words.  Watch the derivatives.  It used to be only four, but now there are five “too big to fail” banks in the United States that each have more than 40trillion dollars in exposure to derivatives.  Today, the U.S. national debt is sitting at a grand total of about 17.7 trillion dollars, so when we are talking about 40 trillion dollars we are talking about an amount of money that is almost unimaginable....


JPMorgan Chase

Total Assets: $2,476,986,000,000 (about 2.5 trillion dollars)

Total Exposure To Derivatives: $67,951,190,000,000 (more than 67 trillion dollars)


Total Assets: $1,894,736,000,000 (almost 1.9 trillion dollars)

Total Exposure To Derivatives: $59,944,502,000,000 (nearly 60 trillion dollars)

Goldman Sachs

Total Assets: $915,705,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $54,564,516,000,000 (more than 54 trillion dollars)

Bank Of America

Total Assets: $2,152,533,000,000 (a bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $54,457,605,000,000 (more than 54 trillion dollars)

Morgan Stanley

Total Assets: $831,381,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $44,946,153,000,000 (more than 44 trillion dollars)

Please read more here and here. Another "Iris Mack Warned Larry Summers About Derivatives" Article...

Summers Debate With Hubbard At Steve Cohen’s House Missed Key Points

by Mark Melin

Sure appears as though Larry Summers likes ordering around women and when he is told no he gets aggressively mad.

Larry Summers

Summers’ debate with Hubbard

Summers was the flashpoint of a recent closed door debate with the conservative dean of Columbia University’s business school, Glen Hubbard. The private event, hosted at the Greenwich, CT mansion of well known hedge fund executive Steve Cohen and reported by Fox Business News, covered financial reform, “Obamacare” and taxes – but likely avoided the real issues that matter in Summers’ past.

But on this night Summers wasn’t shy about displaying his personality by doing something rarely done to male Federal Reserve Chairmen. Summers, a stalwart of the big banking elite from the start of derivatives deregulation in 1998, was openly critical of the sitting Fed Chairwoman Janet Yellen, calling out her recent comments that certain sectors of the stock market may be in a bit of a bubble.

Summers didn’t need to call out Yellen’s encroachment into stock picking territory – it had been well covered and generally acknowledged as a misstep. The question is would the man who was turned down as Fed Chairman in favor of Yellen have done that to a man?

Summers never publicly called out former Fed bosses Ben Bernanke or Alan Greenspan despite their much more serious missteps? Were his vocal cords not working when the Fed Chaimmen made what are publicly documented mistakes?

Is a different standard at play?

Consider that Summers wanted to manage interest rates at the Fed, but had no clue about interest rate direction. But what’s even worse, he was warned.

Summers humiliated Brooksley Born

We could highlight the obvious Brooksley Born hit. This is where Summers is documented to have worked at the reported behest of the largest banks to remove Born in humiliating fashion as CFTC Chairwoman because she only asked for information on the unregulated derivatives that would ultimately blow up the economy.

Summers was said to have treated Born in a demeaning fashion, which is the polite language for what actually happened.

But that’s the easy story to tell.

Perhaps the more significant story is to put the proper frame around the man who can be considered a responsible for the derivatives disasters of past, present and future is his time spent at Harvard University working as a trader… er… I mean school president.  During his tenure Summers was credited with losing $1.8 billions on wrong way derivatives trades – on interest rates.

Consider that Summers wanted to manage interest rates at the Fed, but had no clue about interest rate direction. But what’s even worse, he was warned.

Dr. Iris Mack, now a well-known derivatives expert teaching at Tulane University, was an up and coming derivatives wiz kid in a very unusual sense.  She is smart, beautiful, African-American woman – a triple whammy in the clubby derivatives industry, where both females and African-Americans are in short supply among the trading ranks.

But it was Mack who warned Summers about his impending derivatives implosion with Harvard’s money. It was a logical warning, backed by mathematical analysis and exposure ratios, according to sources involved in the incident.

But the advice was ignored. Perhaps it was because she was female the risk management discussion was avoided, perhaps it was the color of her skin, or perhaps Summers just couldn’t believe that unregulated derivatives, the backbone of his existence, could betray him.  Who knows. Getting into a traders head during a derivatives implosion is a scary place.

Summers lashes back on risk management discussion

What is clear is that Summers didn’t just politely ignore the risk management discussion.  He lashed back, giving Mack a beatdown that appeared to go past the humiliation felt by Born.

Mack recovered and went on to form, a math and financial literacy educational organization,  in-between international assignments, book writing and teaching.

Please read more here.

Thanks to Harvard, Larry Summers & the Economic Policy Journal!

Harvard Money Management Should Have Listened to Iris Mack....

The Economic Policy Journal
...instead of firing her, when she warned them about their dangerous derivatives positions.. (SEE: Is a Big Problem Brewing for Larry Summers?).