In a giant bubble

My friend and colleague Mr. Practical Thinker had some fascinating points on his view of the current global market place and debt crisis {Mr. PT's blog}. Though my thoughts are probably not able to add new revelation on his ideas, I do think it's important that we look to see what paper (JPM in particular) is doing to cover their risk is just one tiny sliver of the market.

As an avid follower of the yield curve and its largest participants, I always find it fascinating when paper decides to do something that is strange AND expensive.

Many large institutions have been selling May and June strangles in the Ten Year Note (TY). This is a common, quarterly occurrence and includes the likes of PIMCO, JPM, SSB, and ML. Understanding why they do these strangles usually has to come from the gaze of, "We need to add return X+1.5% (yield enhancement) on our mortgage portfolio, how can we accomplish this?" Commonly, they will sell a strangle to help bolster the bottom line. (i.e. if you were to sell 100 June 115-120 strangles at 36 ticks, you would receive $56250)

This strategy can be especially advantageous if you are long a basket of bond-type instruments because this will offer you a forced sell on the upside (short calls) at higher prices than you purchased and a forced buy on the downside (short puts) at levels that would average in better long term costs.

Today, JPM decided to do the opposite. They actually spent money and have been doing so for the last few trading sessions. They have now purchased roughly 12,500 June 123 calls for an average price of 5.75 ticks. This trade represents a 1.12mm insurance policy just in case the world decides to go bonkers. If the Greek debt crisis explodes or if the Russians default again or any of the other random, fat-tail events (that one of my heroes Nassim Nicholas Taleb writes about) actually occur.

As a local thinks: These are airport options if you sell them. Either you're going to the airport to take a fantastic trip because of your immense profits or you're headed to the airport to get out of town before your clearing firm figures out how much you've lost! Either way...you're headed on a trip!