Lehman Brothers (LEH) and Bear Stearns (BSC) and Long Term Capital Management (back in 1998) and Washington Mutual (WM) and Indymac and many other financials all suffer form the same thing - Gambler’s Ruin.  Gambler’s Ruin is extremely likely when you use too much leverage.

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Today as the market slipped I noticed that option premiums were not expanding much.  However, I did notice that there were firmer bids for puts.  In a contract where the size is normally 30 contracts bid by 30 ask, I saw the bid ask size edging upward to maybe 60 x 60 or 100 x 100.  I did not see price appreciation.  I saw firmer bids.

This is a good sign and a step in the right direction.

The next step will be wider spreads.  I will start to see the ask on my puts move higher, but not the bid.  At some point, the price pressure downward in the underlying will cause volatility in the name to hit a Tipping Point.  If you have owned premium during times of extreme volatility, you know what happens after the tipping point.  Volatility expands out so quick that all you have is wishful thinking and hindsight and would-a, should-a could-a’s in your head.

Unless you are positioned correctly.

It is then that you can hit it big.

the tipping point

Me: You know what’s funny?

Me: What?

Me: That in hindsight my dreams always seem so small.