Dow Looks Poised to Fall Below 7,000

Futures are trading substantially lower this morning following more bad news out of the financial sector. The Dow futures are down 113, S&P futures are down 16 while Nasdaq futures are lower by 18. As I mentioned on Friday, nobody wanted to go long before the weekend and here is the reason why.

American International Group (AIG, $0.51, up $0.09) said it lost $62 billion in the fourth quarter, the biggest quarterly loss ever in U.S. corporate history, but got another $30 billion from the government. AIG lost $23.00 a share and is a 42 cent stock. If you are keeping track of the losses, that’s $100 billion for AIG in 2008. Yet, its shares are up 20% in pre-market trading.

HSBC Holdings (HBC, $27.55, down $7.25) is a different story. Its shares are down 20% in early action as they said they needed to raise about $18 billion by selling discounted shares. The company reported a profit drop of 70% and cut its dividend. This stock is no stranger to the blog as we were successful in playing HSBC to the downside back in January. The February 45 puts returned over 150% but the real story is with the March options. Yes, they have already been closed but check out the quotes from Friday’s close to where the March options closed at on January 15.

The HSBC March 45 puts (HBCOI, $10.80) were profiled at $4.75 and were closed at $9, the March 40 puts (HBCOH, $6.30) at $2.75 and closed at $6, the March 35 puts (HBCOG, $2.90) were profiled at $1.70 and closed at $4+. Although we made our money back in January, these put options will post huge gains today.

Obviously, the call options I mentioned in last night’s Weekly Wrap will be a lot cheaper so we will continue to monitor them, DO NOT take any action. The market is set to open in 10 minutes so let’s see how we look in a hour. If there was ever a week for capitulation, this is it.

Rick Rouse
Rick@OptionsMentoring.com

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