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Thursday, October 29, 2009

Morgan Stanley's latest derivative tout

I just wanted to bring up Morgan Stanley's latest tout from their derivative desk that came out yesterday.

Here it is, and it's also below:

We believe that hedging equities in a scenario of dollar strength makes sense, and at the same time find upside plays on exporters a good way to position for a continued dollar decline. As a hedge against potential equity weakness that occurs in tandem with a stronger dollar, we advocate short-term S&P 500 puts that “knock in” if the dollar strengthens, and find that such strategies reduce put option costs by one-third to one-half.

When derivative desks are creating synthetic products that are cheaper because of another derivative event, you know that trade is played out.

The idea that our market will only sell off if the dollar weakens is quite frankly yesterday's news.

Which is why this strategy is now recommended in print by Morgan Stanley.

This play also contributed to Wednesday's sell-off--oh my--the dollar strengthened--sell stocks!

Which begs the question. Which bills would you use?

(The dollar derivative play is on page 9)