Boy, it's hard to be a stock and options trader

Brian Perry · 04-19-2003, 03:03 PM

While it's not my main job, I like to dabble in the financial markets, whether it's stocks, options, or commodities. What happened to me this last weekend is enough to remind me that it's a very strange world out there and I might be better off sticking with safer investments.

As most of you know, American Airlines has been on a path to bankruptcy over the past several months, and was threatening to file for bankruptcy last Tuesday if all three of its unions didn't accept stiff wage concessions of $1.8 billion per year. (American lost $5.3 billion over the last two years, so I'm not sure that the $1.8 billion in savings would even help them enough.) With the stock trading around $3.80, I bought some April 5 Puts on Tuesday, which gave me the right to sell AA stock for $5. I was predicting the flight attendants would reject the concessions and AA would immediately file for bankruptcy as promised.

Well, I was right...kind of. The flight attendants rejected the plan but then (to my dismay) were allowed one extra day to change their votes, thanks to some technical issues with the voting system and also because AA sweetened the deal at the last minute. The votes were recounted and the union narrowly accepted the proposal. The stock surged over $5 on Thursday, which is when my options expired--due to Good Friday. I decided not to exercise my Put options and thus my entire investment was wiped out.

If that weren't bad enough, yesterday we learned that American had a "secret" bonus plan for its top executives that was disclosed just after the final union voting. The flight attendants union, understandabley livid, said it was rescinding its acceptance of the pay cuts and will now conduct a re-vote. Basically it sounds like American is now screwed and is very likely to file for bankruptcy next week. Unfortunately my options are worthless now, thanks to incredibly bad timing and a scumbag executive team at American.

Anyone else have any investing horror stories? (But don't get me started on my Phillip Morris position!)

Don Black · 04-19-2003, 06:57 PM

Frankly, I don't find a salary of $500k-$1M unreasonale for a CEO of a company with tens of thousands of employees. I know investment bankers in their 20s making that much with not even 1% of the responsibility. It's not like they deliberately created these programs to screw the unions. The pension plan was in place for 17 years.

Todd Hochard · 04-19-2003, 07:31 PM

Lucent. Thank you, drive through.

Actually, I am my own worst enemy at times. I've proven to be a horrible investor, but a great trader. In other words, my quick buck turnarounds have mostly worked out pretty well (>25% each year, total return for the past four years running), but my long-term stuff is killing me. I seem to lack the courage to admit defeat and take a loss, at least until it becomes a huge loss.

Todd

Evan S · 04-19-2003, 11:26 PM

I'm in the middle of the CFA (Chartered Financial Analyst) examinations (level II).

Everyone knows puts and calls are HEDGING instruments used to insure a portfolio long (short) in the underlying security(s) for which the puts and calls are bought. They're instruments that are suppose to LIMIT the riskiness of the holdings. The trade off is that your upside gains are limited.

The definition of using puts and calls in isolation as an investment in their own right is SPECULATION, and for a reason...they are extremely volatile.

I admire your balls...for investing in puts and calls on their own is just that...ballsy.

Philip_G · 04-19-2003, 11:40 PM

I had a response about the unions but then it dawned on me that I can't post it here.

**HTF Ads**

Edwin-S · 04-20-2003, 05:10 PM

I had a response about scumbag management not creating programs to screw the unions, but it dawned on me I cannot post it either.

Ryan Wright · 04-21-2003, 01:00 PM

Brian,

Damn.

Doesn't sound like fun.

Edit: Nevermind, found the answer to my questions.

LewB · 04-21-2003, 06:44 PM

If you are going to gamble on stuff like puts and calls, I'll offer some advice that my father used to give me. "You're better off going to Vegas, at least there you get comp'ed"

No rants about management and their perks ?

Brian Perry · 04-22-2003, 09:10 AM

Just as I thought, AMR stock plunged to around $3.50. Oh well.

As far as management vs. union, I wasn't trying to say one side was better than the other. In this case, I was pointing out that management apparently was deceptive by waiting until the voting was over to disclose the executive perks. The perks in and of themselves may not have been out of line--it was just the way they were hidden that was unfortunate. (And CEO Donald Carty has been apologizing profusely the last few days as an attempt at damage control.)

Ashley Seymour · 04-22-2003, 09:55 PM

With the stock trading around $3.80, I bought some April 5 Puts on Tuesday, which gave me the right to sell AA stock for $5. I was predicting the flight attendants would reject the concessions and AA would immediately file for bankruptcy as promised.

Your investment in puts and calls may be "balsey" as Evan S says, but your loss goes beyond your gamble that the union would reject the contract.

I am guessing your puts would have cost about $150 each. The real speculation is that you only had a couple of days to exercise. Had the airline filed for bankruptcy then what would have happened to the options? If trading on the stock was stopped, how would you be able to buy the stock to put to the option seller?

If the stock priced dropped to $1, then you would have made $250 on each option costing $150. A nice return, but you can see the risk. Also, even in bankruptcy, the company would have some liquidation value and may have kept it's price for some time.

Really, two days for an option contract is way risky.