It's going to be a historic day on Wall Street. The government of what used to be capitalisms home, now owns three of the biggest financial corporations in the world and has just announced their intention to buy the troubled mortgage backed securities from more banks. The SEC has also announced a ban on short selling for 799 publicly traded banks. All this on an options expiration Friday.
Of course stocks are going to rally, to put it mildly. Everything's great now, right? Well, unless you're an options trader, hedge fund manager or in anyway connected to the above. There will be blood on the streets in the options market today. Hedge funds will be devestated. Guess who owns a lot of hedge fund securities? You guessed it, the banks. Also, the folks who made their living selling these 799 securities short aren't going to retire. They're going to take a few days, do some homework and start shorting related securities that haven't been banned.
The joy will be short lived, and when things start going south next week, what are the feds going to do? Ban all short selling? Ban selling entirely? We are in a liquidity crisis and the government just made the market less liquid. It may take a little while for the market to realize this, but when it does, it's going to be ugly.