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Hey Monkey!
•
Got a question about
anything? Ask Monkey,
our resident primate.
•
Or visit the Monkey
Brains blog at
www.thinkorswim.com
•
Illustration by
Evonrude
Q: Hey Monkey,
Newt Gingrich
said that mark-
to-market
accounting
caused the mort-
gage crisis. Mon-
key, say it ain’t
so.
A: Hoo boy, where
do I start with that
one? When ex-politi-
cians start opining
about real-world
trading losses, I fig-
ure it must be a slow
day at the recount
office. Among the
dozens of reasons
the credit markets
collapsed, mark-to-
market accounting
isn’t one of them.
Mark to market has
been used in the
trading industry for
decades. It basically
says that your posi-
tions are worth
what the market
says they’re worth
today. Not what you
think they’re worth,
but what the actual
tradable price is. It
works beautifully
with exchange-
traded things like
stocks, futures, and
options; not so
beautifully with
things like houses
and financial instru-
ments cooked up by
overpaid geniuses.
The argument
against mark to mar-
ket for mortgage
securities is that
because they don’t
trade frequently and
there are no industry
standards for pricing
the more esoteric
derivatives, the peo-
ple most qualified to
attach a value to
them are the ones
who actually have
positions in them.
So, who can properly
account for the pro-
jected cash flows,
defaults, etc.? Er,
excuse me? I may
have been born at
night, but it wasn’t
last night. That’s
part of what got us
into this mess. When
you apply for a home
equity loan, does
the bank take your
word for it when you
say the house you
bought last year for
$500,000 is now
worth a million
because you like the
neighborhood? Or
does the CEO of IBM
get to decide the
stock’s worth
$1,000 a share
because he thinks
sales are going to
soar in a crappy
economy because of
some new printer?
No. The problem
isn’t mark to market,
it's a lack of trans-
parency and stan-
dardization. Instead
of griping about
some sensible regu-
lations, offer some
solutions for creat-
ing a real market for
these things.
When ex-politicians
start opining
about real-world trading
losses, I figure
it must be a
slow day at
the recount
office.
into their grasp.
That’s not a game I
want to play. So,
even though I don’t
think there are any
outstanding warrants on my furry little butt, I sat tight at
home and celebrated with a second
glass of 25-year-old
scotch. Tasted even
better than the first.
or sell short (if you
have a short put)
stock to offset a possible assignment, or
not. You could be left
with stock position
Monday morning if
the option is
assigned and you
don't offset, or if you
do offset and the
Q: Hey Monkey! I
hear you’re being
replaced by that
guy from Law and
Order? Yuk yuk!
A: Who, Fred
Thompson? I hear
you can get two-for-one speaking
engagements with
him and Newt.
Q: Hey Monkey,
since when do
they give Pearl
Awards to ani-
mals? Talk about
a popularity con-
test.
A: When I heard that
thinkMoney was
going to win an
award at some cere-
mony, I thought it
was one of those
tricks that the sher-
iff’s office plays
when they want to
lure some fugitive
For more Monkey business of daily market
wraps and trading
ideas, visit the Monkey
Brains blog at
www.thinkorswim.com
by going to the path
Support tab > Monkey-Brains Blog.
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Hey Monkey,
what is "pin risk"?
A: Pin risk occurs
right at expiration
when the stock is
right at, or a couple
pennies away, from
the strike price of
your short option.
The option isn't
clearly in or out of the
money, so, you may
or may not be
assigned. The choice
you have is to buy (if
you have a short call)
option is not
assigned. The not
knowing part is what
traders call “pin risk”.
Hey Monkey,
SXSW. You there?
A: Dude, I am SO
there this year. I hear
Primal Scream will be
playing. Look for me.
I’ll be the chimp in
the Oakleys.
