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Novastar Financial, Inc (NFI)

How BS plays NF...

How BS plays NFI - frm NFI mb

mhatmccane

409 posts

Joined
1/20/2006

How BS plays NFI - frm NFI mb
Posted: 07 Apr 06 7:18 AM

Re: Will NFI join the lawsuits?
by: wise_ol_burd

02/22/06 02:25 pm
Msg: 405003 of 421411

>>>The current thought is that you give the company time and the short problem will disappear.<<<

Just in case someone believes that to be true.. I need to post some very musunderstood facts. The point I am about to make is this. those who are playing NFI and other stocks like OSTK need never go away.

Let me explain the play! The game they play could be described as this... "Create a lot of volatility while driving the stock price down, and than sell very expensive PUTs - as a result of the volatility created the options become expensive - which create the exit strategy for the short seller.

Some facts to make my point here .... currently there are 30,000 March PUT contracts (near the money) for NFI.. that's a huge amount for company with only 31 million shares of stock and it is enough PUTs to cover a 3 million share short position. Compare this to NEW (a favorite long of hedge fund managers like David Einhorn). NEW, with nearly twice as many outstanding shares as NFI, NEW has only 1/10 th as many March near the money PUTs (3,000) vs 30,000 for NFI. Now, even though the NFI PUTs have gotten cheaper since the attacks have stop, the March PUTs are priced with an Implied Volatility which is twice that of the NEW March PUTS. The IV for the NFI PUTs is at 70% now vs. 35% for the NEW shares and about 13% for broad market PUTs such as those on the SPY.

What these guys do is
1. Use naked shorting to drive the stock price down by 25% or so..
2. They than (after the price has bottomed) sell a bunch of highly inflated PUTS to protect the short... For example, right now, the March 30 PUTs are selling for $3.70 each with NFI trading at $27.10. So, if one wished to close a short out right now, he could sell those, for $3,70. If the stock closed at say $29.00 he would have to buy it for $30.00 but he'd get to keep the $3.70 he got for the PUTs and there would be no squeeze. If the stock closes above $30.00, he keeps the $3.70 and sells a new batch of $35 PUTs. Eventually the stock is PUT to him and he is out with a handsome profit and no price squeeze on his naked short sales. He than starts the play all over with another massive naked short selling attack which again drives the stock price down and increases the Volatility which in turn, again increases the price he gets for the PUTs.. It is even more profitable than I indicated because the Hedge fund first buys a bunch of PUTs before he starts the naked short selling attack when the volatility imbedded in the PUT price is relatively low. Rocker had $23 million worth of NFI PUTs as of his last filing. Mr. big short them naked shorts the snot out of the stock which drives the price down a lot and which probably triples the value of his long PUTs as well as making him a bunch of money on the short stock positions.

But, not to lose sight of my point which was this.. there is no need for these attacks to ever stop because this is a constant rollercoaster of Ups and downs.....

All of this works for the hedge fund/manipulator because he alone knows when the game starts and stops because he controls it from start to finish. These people will only go away if they are: 1. Somehow payed off (who knows, that could be what the latest shinanigans with NFI delaying its report was about) or 2. If they think that there is a real chance that someone might sue or prosecute them. In addition, because the dividend is priced into the PUTs which they sell when the stock has bottomed, the dividend actually works to the advantage of the hedge fund because he collects it as part of the PUT price...

mhatmccane

409 posts

Joined
1/20/2006

Re: How BS plays NFI - frm NFI mb
Posted: 11 Apr 06 1:57 PM

And the beat goes on:

NFI taken down today by Hedgy..
by: judge_post 04/11/06 03:16 pm
Msg: 422151 of 422213

Here is what happened.. Between 11:50 AM and Noon, 225,000 shares of NFI stock traded. AT exactly 11.56, 6,000 April $30 calls traded for $1.80 and 6,000 April $30 PUTs traded for $0.20. Disecting these transactions, here is what I believe is going on.

The hedge fund shorted the stock. He also simultaniously created a synthetic short by Selling in the money Calls for $1.80 each and buying out of the money PUTs for $.20 each. His bet is that NFI will close below $30 at the April expiration. If NFI were to close at say $29 and if the Hedge fund were to close out his short at that time, he would make roughly $2.3 M off of this trade. I think the timing is an issue worth noting also. This short will not make the reg SHO list for 13 trading days. The April Options close out in 9 trading days. This hedge fund is betting big time that he can drive the stock price below $30 during the next 10 days. NFI does not have to close below $30 for this to be a profitable trade. If NFI were to close at $30.50 for example, this trade would earn roughly $1.2 M. For him to lose money, NFI would have to close at more than $31.60. But, you can bet on the fact that this trader will be presuring NFI stock for the next week and half.

Scott.. are you listening. Some good news after hours on Friday and you'd screw this guy to the wall!!

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Specific Stocks

Novastar Financial, Inc (NFI)

How BS plays NF...