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Trading When Stocks Run and Reverse

Jun 20 2008

Trading When Stocks Run and Reverse

Today presented two opportunities to trade around a couple of positions that I have. I still believe strongly in both positions but in one case General Motors (GM) moved too much and in the other case Regions Financial (RF) moved against my position.

General Motors

    General Motors and Ford are both having a really difficult time since they focused so much on truck sales and the rising price of oil and gasoline have made trucks very unattractive. GM made a huge move to the downside today, going lower by 6.76%. The company’s earnings outlook was reduced again in the current quarter, in the next quarter, for the year, and for the next year. But the move itself is too far to fast, in my opinion. Therefore I sold half my puts which were up over 85% in two weeks. I will watch the stock and hope for a 3% move up at the open this coming week and possibly re-establish the full position if the outlook for the company has not changed.

Regions Financial

    Regions Financial is another short position that I have and the stock has been in trouble as of late with all banks struggling for profitability, balance sheet stability, and the high costs of their dividends. Regions dividend is currently at 13.30%. For this main reason I switch from a short position in National City Bank to my current position of short Regions Financial. When Fifth Third had to shave its dividend, the stock plummeted and therefore I own 12.50 August Puts on Regions in anticipation of a similar move when the have to lower their dividend.

    Today though saw a reversal of sorts in Regions which allowed me to increase my short position in the bank. I now own 12.50 July Puts in addition to the August Puts mentioned above. This increased short position should pay off in the short-term with stock declines in anticipation of the dividend cut and double when the actual dividend cut happens. At that point I would exit the trade.

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