Hedge Funds, TMA and Margin Calls

If you think you are having a tough time in the market these days, you aren't the only one...

"Hedge funds saw their worst month performance in about five years in January, generating a composite loss of 2.46%. It's the group's worst month since July 2002, when funds saw a loss of 2.86%, according to Chicago-based industry data group Hedge Fund Research...

Santa Fe, N.M.-based lender Thornburg Mortgage(TMA) also has been the subject of mounting margin calls that could be putting it and other financial firms at the precipice. Thornburg saw its stock plummet more than 60% to well below its 52-week low, after saying that it faced new calls from lenders requiring it to post some $270 million in capital on top of the $300 million it already disclosed it had to post last week.

Thornburg's and Peloton's pain are the sorts of narratives that Wall Street fears could play out at other organizations and hedge fund shops as banks and brokers rein in lending amid plummeting prices.

Hedge funds faced a woeful November, when HFR's data showed that the firms posted a composite loss of 2.18%. In the new year, uncertainty lingered and new worries about bond insurers and other arcane aspects of the market continued to unsettle investors. " -source

Speaking of TMA, that was a stock that I talked about a while back in our chat room as a possible bankruptcy candidate. Well that stock really ate it bad over the past week as they have been forced to sell equities to meet margin calls. Then news today in the after hours sent the stock another 40% lower. The story goes something like this:

"The company said late Wednesday that its failure to meet a $28 million margin call from JPMorgan Chase(JPM) has triggered a series of defaults on various lending agreements.

The company's obligations under those agreements are "material," Thornburg said in a filing with the Securities and Exchange Commission.

About $320 million was lent to Thornburg by JPMorgan, which notified Thornburg that it planned to exercise its rights under the loan agreement due to the default, which resulted in cross-defaults across other loan pacts.

The announcement comes just two days after the mortgage lender announced a cash infusion involving about $1 billion of prime hybrid adjustable-rate mortgage loans. Thornburg has been burned by nearly $600 million in margin calls over the past month, following the slide in the mortgage-backed securities market. " -source

Now don't get me wrong here, I am bearish on the financial sector among other things and I own BAC and MDC puts (wish I held my FNM puts but oh well). But this decline (see above) is too much, too fast for a stock that is certainly heavily shorted. Furthermore, TMA was able to hold up for so long because they are the best in the industry. They typically lend to only higher income customers and had been turning a profit and raising their mile high dividend even as NFI, NEW, etc went belly up. So there is likely some value there and I would be surprised if they go bankrupt all of a sudden because of a $28M margin call.

I think this stock will rocket at some point tomorrow and see massive gains over the next two weeks. The options are too expensive to buy with implied volatility over 400%, yes I said over 400%, so I will be writing naked $2.50 March puts and buying stock (its as cheap as an option anyways). The nice thing about writing naked $2.50 puts is that you can't loose more than $2.50 minus the cost of the option, which is going to be about 1$ tomorrow morning. And thats only if it goes to zero in the next two weeks. Furthermore, those options will decay faster than Radium-216 and I'd bet you see at least 50% gains from the first half hour till the close tomorrow. This one of those plays where I will put as much cash into it because these types of opportunities don't come along too long. I wonder how high that implied volatility will get by tomorrow morning, should be fun. One word of caution, the P&F chart actually has a price objective of $0.0 for the stock.

They say that when theres blood in the streets its time to buy, but I would prefer to adopt a slightly different motto: When theres blood in the streets, write naked puts. (tm) And you can quote me on that.