STTG Market Recap Sep 27, 2012

Blain here, quick note, for those of you who have iPads, I highly recommend take a look at the new Top Stocks by MarketSmith app. I wrote up a full review just this morning and amongst other features, the app gives access to MarketSmith charts for free. Most certainly worth a look!

Thursday’s market was the anthithesis of Tuesday’s market as George Costanza rules.  Tuesday a spate of good economic news was met with sharp selling; today a spate of poor economic news was met with buying.  Somewhere George is smiling to himself.  The S&P 500 was up 1%, while the NASDAQ gained 1.4%.  Oil had its best day in weeks which led the turnaround as a lot of beaten down sectors such as mining and semiconductors finally found a bid.


Durable goods, a revision downward in GDP for the second quarter, and a drop in pending home sales all were negative economic data points.  However, a formal document stating a 2013 budget and some economic reforms out of Spain (widely expected) seemed to calm markets or at least provide an excuse to bounce from oversold levels.

As for the indexes, after about a 3% correction the S&P 500 is back into its ascending channel and has worked off its overbough condition.

The NASDAQ, while more choppy, had much broader participation than it had seen in weeks as it wasn’t just the Apple or Google show.


What U.S. city do you think finished first in Businessweek’s 2012 survey? Hint: think bridges.

Original post: STTG Market Recap Sep 27, 2012

Stock Trading To Go

Take Chips off the table? Using the Portfolio Put strategy.

Is the market’s recent Central Bank inspired rally causing you to think I better get out before it reverses and I give any gains all back?  Last week I wrote about using overwritten covered calls to reduce the exposure of a specific stock holding.  Today I discuss the 2nd potential strategy, the portfolio put. This strategy is designed for investors looking to take some chips off the table, given the recent rally which accelerated last week.  A portfolio put can hedge an entire portfolio with one broad based ETF put option purchase.

The portfolio put is used when traders are looking to hedge the macro market risk imbedded in every stock portfolio.  When you buy any stock, that stock’s valuation has a market component to it.  If the overall market is higher it is more likely your stock holding will be higher.  If the overall market falls, it is difficult for even the best stock picks to rise against the falling tide. Besides the ease of using one put purchase to hedge an entire portfolio of stock and option positions, another benefit of a portfolio put in broad-based ETFs is that the implied volatility reflected in the cost of the put option is often lower than a specific stock married put.  Like a married put hedge, the maximum loss associated with buying the put is the premium paid.  The put purchased will reduce the performance of the overall portfolio owned by the premium if it expires worthless.  For a complete description of the portfolio put, take the time to view our Webinar Series from Buy and Hedge here.  This strategy is discussed in Part 2.

For most U.S. equity portfolios the S&P 500 index is the benchmark.  The ETF on this index is the SPDR S&P 500 (SPY) which is extremely liquid.    To construct the proper hedge investors need to determine how many option contracts to purchase, which month to purchase those contracts, and which strike price to choose.

Using the OptionsHouse Risk Viewer tool and applying some simple math will enable you to determine how many puts will hedge your current market exposure.   The Risk Viewer can quickly show you your Beta weighted exposure in dollar deltas on the Greeks Tab.  In my virtual example below this portfolio has a dollar delta of 204,000 dollars.

The SPY ETF is currently trading at 147.  So to determine how many contracts would hedge this portfolio simply take the 204,000 divided by 147 to get the number of SPY shares which this is long equivalent = 1388 shares.  Divide by 100 as each option contract controls 100 shares of stock 13.88 contracts.  Let’s round that to 14 contracts.

Next, you need to determine the correct month to purchase your portfolio put hedge.  Fundamentally, you may wish to hedge the rest of the calendar year since the market has risen 17% on the year.  Or perhaps you want to remove some uncertainty through the November elections.  Theoretically, it is important to mold your fundamental view with the knowledge that options are a wasting asset.  They decay over time with the highest percentage of the decay taking place in the last days and weeks of an options life.  So while a shorter term option will cost less premium at the onset, a longer term option will experience less premium decay each and every day.  This is measured by the Theta of the option and can be found on the Option Chain using the Greeks Format.   I would suggest going out a bit further from your fundamental forecast for 2 reasons.  You will reduce the amount of decay today and remember, you can always sell the long put out before expiration should you no longer require it.

The final step in constructing the correct Portfolio Put trade is determining the strike price.  Again as we did with the covered call example we are going to use delta as our guide.  How much portfolio risk do we want to hedge?  An at-the-money (ATM) put will have about a 50 delta.  This means that this put option should theoretically move 50% of the overall market’s move.  Another way to think about it is the premium required to pay is your hedge premium to limit any downside from this ATM point.  This put would be more expensive than an out of the money downside put.  Again, look at the delta.  Let’s  say you want to take about a third of your chips (market exposure) off the table through the end of year.  In SPY they actually trade Quarterly options which allow this specific hedge trade and these quarterlies expire on December 31st.  The 140 strike puts with this end of year expiration date exhibit a 31 delta today and since this is an approximate hedge that is close enough for our purpose.  The premium required today is $ 2.88 on these 140 puts, which should be analyzed as a percent of the current stock price, (2.88/147.00) = 1.95%.  So for 1.95 percent, you can own a downside hedge for the remainder of the year.  Where does the hedge kick in?  Since the strike price is positioned 7 points below the current spot, 7 points divided by 147 is 4.76% to the downside.  These calculations are important because should the market fall you know that you have a put hedge, which at expiration will allow you the right to sell the SPY ETF stock 4.75% below the current level.  Add the premium required for this put, and you might possibly sleep better at night knowing that should the market fall, you will theoretically make money on your SPY puts and mitigate losses beyond down 6.70% from the current levels.    Remember puts on the SPY move inversely to market moves between now and expiry, today close to the put’s delta of 31%.    This delta will change due to the passage of time and the price of the underlying.  So continue to monitor your Risk Viewer to get a complete picture of your portfolio’s exposure.

After purchasing a portfolio put you still are long the market, and you still definitely want the market to continue to appreciate, however the downside is mitigated on an overall market move lower.  You can view your slide risk by by looking one more time at the Risk Viewer:

Again, this is not a buy, sell, or hold recommendation, but simply an example of how stock investors can use a Portfolio Put option to take some chips off the table on an entire portfolio of appreciated stock positions.   Next time I will discuss using in the money call options to provide investors hedged long exposure to this market.




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  1. Chips off the table? Using the Call overwrite.
  2. What wall of worry? Implied Volatilities are low
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ConocoPhillips – Better off as Friends

Written By: DragonFly Capital

April 12, 2012 ConocoPhillips, $ COP, divorced, spinning off Phillips 66, $ PSX, to ‘unlock shareholder value’. This is the common stated reasoning for spin offs but most suspect that insiders benefit more than shareholders. And looking at the charts of both that stereotype was reinforced….for about 6 weeks. Since then both have been screaming higher, giving little opportunity for a clean entry. That may be about to change. Lets look at the charts.

ConocoPhillips, $ COP

ConocoPhillips, $ COP, has been in a rising channel since early June. The latest pullbakc is finding support at 57 and this looks like a good level to enter long against. The Relative Strength Index (RSI) is bullish and holding the mid line with a turn back higher. There is only the previous top near 58.50 keeping it from a breakout of the current flag to the upside target at 60.50, with the price objective of the 3-box reversal Point and Figure chart (PnF) at 65 above that.

Phillips 66, $ PSX

Phillips 66, $ PSX, has also been running higher since the beginning of June. It is consolidating in a bull flag with a top at 47 and has a target on a break out higher to 51. The bullish RSI supports a move higher here as well. If you can only pick one then you should also be aware that the PnF price objective for Phillips 66 is all the way up at 85.

So maybe the stereotype is not always right. Moral of the story: Pay attention to price action and not what investing folklore.

Disclosure; I bought $ PSX earlier today for family in a long term account.

Dragonfly Capital Views Anniversary Celebration

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This is 20% off of the standard annual subscription price and nearly 45% off of a rolling monthly membership! Don’t miss this limited opportunity! Sign up here.

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Dragonfly Capital Views Performance Through September 2012 Expiry

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Mitt Romney explains the fire triangle

Following an in-flight fire on an airplane chartered for his wife, Mitt Romney explains the fire triangle:

“I appreciate the fact that she is on the ground, safe and sound. And I don’t think she knows just how worried some of us were,” Romney said. “When you have a fire in an aircraft, there’s no place to go, exactly, there’s no — and you can’t find any oxygen from outside the aircraft to get in the aircraft, because the windows don’t open. I don’t know why they don’t do that. It’s a real problem. So it’s very dangerous. And she was choking and rubbing her eyes. Fortunately, there was enough oxygen for the pilot and copilot to make a safe landing in Denver. But she’s safe and sound.”

From the Los Angeles Times.

[As a former airline first officer, I appreciate the fact that the copilot got mentioned. It is also nice that no dog was strapped to the roof of this aircraft.]

Philip Greenspun’s Weblog

Chips off the table? Using the Call overwrite.

Option volume is starting to pick up the past couple of days so it appears that traders are starting to notice that the market has experienced a nice run this summer.  Since June 1st when the SPX closed on a low of 1278.04, Friday’s close of 1437.92 represents a gain of 12.5%!  That’s really impressive especially with the doom and gloom being prognosticated across media outlets by the markets talking heads.  One message that can’t be disputed is the fact that the Euro zone debt crisis isn’t over just because some Euro Central banker say it is.  The election in the US is still a wild card and future implied volatility is still upwardly sloped.  This indicates the options markets are predicting more movement than what we have been experiencing recently, the historical 30 day actual volatility of 10.33%.

Yesterday’s selloff is just a small reminder that equity prices that exhibit positive momentum don’t go higher continuously.  This reality should lead at least some to wonder if it is time to take some chips off the table and,how best to do so?

If you are of the mindset that now is the time to reduce and pull back, but you don’t want to just sell or close your long equity exposure there are four option strategies which could be considered depending on your outlook and risk tolerance:

I. Over write long stocks
II. Portfolio SPY puts and put spreads
III. Stock replacement strategies: Long Calls vs. Long Stock
IV. Convert to spreads –  naked long calls and naked short puts

Today I am going to discuss Over Written Calls or Covered Calls.

A Covered Call is one of the first option trades stock traders commonly employ and with good reason.  An overwritten short call (Covered Call) on a long stock position can be used to do all of the following: pick an exit point, generate income from a stock holding, or reduce the amount of the current long exposure to a naked long stock position.  A full description of the covered call strategy is available on our webinar archive in the strategy section here.

When used in the context of pulling some chips off the table, I would first use the delta of the call to determine the percentage of long stock exposure you wish to reduce.  Delta is the option “Greek” which measures the theoretical price move expected for a 1 point move higher in the underlying stock price.  The range in deltas for calls is 0-1.00, but since options are contracts on 100 shares of stock most professional traders refer to calls having 0-100 deltas. So, for example, if you were fortunate enough to be long 100 shares of Apple (AAPL_ during this year’s run up you might then consider a 25 Delta call to reduce 25% of your exposure to Apples price move.  Remember you are selling the call so the short call is short 25 deltas.  Combine this with long 100 shares of stock, and your resultant exposure is now 75 shares.  If you want to take more “off the table”, increase the delta of the option you sell.  The higher the delta, the higher the premium you will receive, but the strike will be closer to the current stock price and the higher the chance that your stock may be called away from you at expiration.

You also need to determine which expiration month you want to overwrite my call.  The longer the time to expiration the higher the premium you will receive.  November options expiring in 66 days, would take us through the new iPhone release, another earnings date (10/23)as well as the US election.  Also, there is an expected dividend again falling around this date so be aware of that. The 25 delta option occurs in the 730 strike in November which sellers can receive a 13.50 premium. Notice now you are only looking at the premium you receive.  Your evaluation was based on the percent of 100 share exposure you wanted to reduce as well as the term you are willing to be short the call and have the obligation sell your shares at a predetermined price.   Now looking at the premium you can determine if you  are comfortable with the amount you receive today as an exit point in the stock and the amount of downside protection this premium provides.  $ 13.50 is around 2% of the price of AAPL shares ($ 668.00 at the time I write this).  Selling this call option will offset a 2% decline in the share price of the stock between now and expiry, offsetting losses down to 654.50. Also you have to be comfortable with your exit point if the stock is called away.  The 730 strike price plus the $ 13.50 premium equals 743.50. This is the price point you will be obligated to sell your long shares should the stock be higher than 730 at expiration.  That level is roughly $ 75.50 higher than the current stock level or 11.3%.

Sounds good, but remember nothing comes free in options.  The stock has gained 65% year to date and just yesterday the shares fell over 2% in a day!  The point being this stock does move.  Remember you cannot sell your stock without buying back the short call unless you have suitability for naked options and sufficient margin equity to cover the short call.

This is not a buy, sell, or hold recommendation, but simply an example of how you can look to overwriting a call option to take some chips off the table on specific appreciated stock positions.   Tomorrow I will discuss the portfolio put strategy to achieve the same objective.


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The (Truly Dangerous) Bull In a China Shop: The American Value of Supporting Gratuitous Insults of Other Countries Majority Religions

After expressing sorrow about
the deaths, Mr. Romney told reporters on the campaign trail that the Obama
administration had tried to appease Islamic extremists who should have been
condemned instead. He said a statement issued by the American Embassy in Cairo
before the deaths criticizing an anti-Islamic video was “akin to an apology”
and a “severe miscalculation.”
first response of the United States must be outrage at the breach of the
sovereignty of our nation, and apology for American values is never the right
course,” Mr. Romney said, speaking at a campaign stop in Jacksonville, Fla. He
added, “They clearly sent mixed messages to the world.”
Embassy Attack Fuels Escalation in U.S. Presidential Race, Peter
Baker, New York Times, today
For the last few days I’d thought that all Obama had to
do to wrap up this election was run ads showing clips of Romney’s bizarre interview
on last Sunday’s Meet the Press—e.g., “Well, the specifics [of the tax plan] are these which is
those principles I described are the heart of my policy.”—maybe juxtaposed with
clips of Romney’s speech to the Detroit Economic Club last February in which he
identified some specifics, er, principles.  (Or is it principles, er, specifics?  Hard to tell, with such specific principles.)
And I still think that an ad of that sort would do the trick.
But I also now think that a precise, appropriate response by Obama
to Romney’s weird statement would effectively end Romney’s election chances.  It is, after all, hard to imagine a more
dangerous statement by a president, and therefore by a presidential candidate,
than the pronouncement that America’s values—America’s values— include wanting Americans to deliberately offend the world’s
Romney apparently believes that it’s fine to risk American lives
overseas (including, presumably, member of our military) by appearing to
support such pointlessly offensive provocation. 
Obama should point this out, even if the news media doesn’t.
But Obama also shouldn’t allow the detachment of those comments by
Romney, which indicate pretty starkly that Romney doesn’t understand even the
concept of diplomacy, from the implications of those comments in spheres beyond
foreign policy and defense.  I’ve
wondered for a while now why the Obama campaign hasn’t emphasized more Romney’s
persistent habit of drawing conclusions based upon erroneous fact or upon no
facts at all. 
The very essence of Romney’s candidacy, at least originally, was
his claimed cool-headed judgment and problem-solving ability.  Yet time and again he appears unable to accurately
or adequately assess basic facts and understand even the most obvious implications
of those facts—and of his own statements and conduct.  But what has been apparent to me for nearly a
year now, and what this incident should now clarify for the general public, is
that Romney is not prompted to action—whether on foreign policy, defense, the
economy, or anything else—by anything other than immediate opportunism,
ideology, and, worst of all, a seeming inability even to understand the implications of what he says, what he proposes and
what he does.
I don’t see how his election hopes can survive his comments of
yesterday and today. 

Angry Bear

STTG Market Recap Sep 11, 2012

Starting off today’s recap right with Facebook (FB), which is most certainly worthy of an update. Facebook announced it would not do a secondary offering to pay its tax bill (1st highlight below), then today Zuckerberg’s set to speak live at TechCrunch Disrupt (2nd highlight below), and we can clearly see Institutions are backing the stock. Translation, FB is showing key signs of an established bottom and looming higher prices. *UPDATE* 5:38 PM – Zuckerberg just got off stage and FB is trading +$ .87 (+4.47%) to $ 20.30 after-hours.

Next up, Oil, which was a reader request. Oil has been trending sideways and out of the limelight technically but hard to ignore considering gas prices are at record highs. I paid $ 71 recently to fill up my SUV, $ 4.59 per gallon, just crazy absurd.

And there is Natural Gas which is below with ETF UNG. Natural gas affirmed a credible bottom back on June 14th and looks like it wants higher prices. Considering Oil and the validity for natural gas as an energy producer here in the US, it is becoming increasingly more in demand and worth keeping an eye on.

One more quick chart before the indices, this of United Natural Foods (UNFI), which is a play on the organic food market. From my Marketsmith account, the stock shed 8.6% on weak 2013 guidance, finding support at its 50 day moving average (learn all about them at InvestingTeacher). Important to note as it will affect peer stocks like Whole Foods Market (WFM) long term. A caution flag for those still long the organic trend.

Last but not least, updated looks at the market indices. Stay frosty out there and we’ll see all 15,000+ of you back here tomorrow!

Original post: STTG Market Recap Sep 11, 2012

Stock Trading To Go

Top Trade Ideas for the Week of September 10, 2012: The Rest

Written By: DragonFly Capital

Here are the Rest of the Top 10:

Abbott Labs, Ticker: $ ABT

Abbott Labs, $ ABT, is moving higher and at resistance after consolidating at the 50 day Simple Moving Average (SMA). The Relative Strength Index (RSI) is bullish and rising with a Moving Average Convergence Divergence indicator (MACD) that has crossed to positive, and SMA’s all pointing higher. The Measured Move higher takes it to 68, but the 3-box reversal Point and Figure chart (PnF) has a price objective of 94, well above that.

BB&T, Ticker: $ BBT

BB&T, $ BBT, is breaking the triple top at 32.60 with a RSI that is bullish and rising and a MACD that at is positive to support further upside price movement. It has a target on a Measured Move higher to 37.30 and a PnF price objective at 57.50 above that.

DSW, Ticker: $ DSW

DSW, $ DSW, moved above a double top two weeks ago and has been consolidating in a bull flag since. It has a RSI that is bullish and a MACD that is negative, but shallow and not unexpected in a bull flag. A move over the top of the flag carries a Measured Move to 70.25 with the PnF price objective at 92 above that. Elevated short interest near 8% could also fuel a move higher.

FirstMerit, Ticker: $ FMER

FirstMerit, $ FMER, broke above a triple top at 16.70 Friday and is near resistance from March at 17.15. Above that brings a wide angle target of 23 on a weekly timeframe Measured Move. The PnF price objective is above that even at 25.50. The rising and bullish RSI and positive MACD support further upside as well.

iRobot, Ticker: $ IRBT

iRobot, $ IRBT,is moving up near resistance at 26.40 and now over the 200 day SMA. Through resistance higher carries a Measured Move to 30.40 and the PnF sees it even higher with a price objective of 39. The RSI is bullish and the MACD, although negative, is improving, to support a move higher. The short interest near 9% could help it higher as well.

Up Next: Bonus Idea

The Best

If you like what you see sign up for more ideas and deeper analysis using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits feed and on chartly.

After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Saturday which, with the full workforce returning from vacation the markets are looking very bullish. Gold looks to continue its uptrend while Crude Oil may consolidate with in the current uptrend. The US Dollar Index is wounded and heading lower and US Treasuries look to follow it lower as well. The Shanghai Composite is ready for a continued bounce in the downtrend and Emerging Markets are looking higher in the broad range. Volatility looks to remain very low making for an environment for the equity index ETF’s SPY, IWM and QQQ, to continue higher. And all three charts on both the daily and weekly timeframes are set up to comply. Use this information as you prepare for the coming week and trade’m well.

Dragonfly Capital

Destroying the earth by buying organic locally produced food?

Harvest season is upon us in New England and with it the opportunity to buy organic locally farmed produce for 2-4X what Costco charges to drag the same vegetable or fruit up from Mexico and dump it into your minivan in Waltham.

A variety of analyses on whether or not locally produced food is truly good for the environment have been made, e.g.,

I wonder if a simpler analysis would not apply. Let’s assume that every dollar we spend does a relatively constant amount of damage to the earth. If I give a person or a business an extra dollar, a fraction of that will be spent to buy gasoline, buy new manufactured products and discard old ones, buy electricity that will result in fossil fuels being burned, etc. There are some minor variations in how much damage will be done depending on the person or business that I give the dollar to, but in nearly all cases the more money spent the more damage will be done to the planet.

Thus if I buy local food for 4X the cost of food produced in Mexico, I am paying for New Englanders to drive around in cars, heat their houses with oil, purchase new smart phones and tablet computers, etc. Had I instead bought the produce from Mexico, I would have supported Mexicans who walk to work, heat just one room of their house and only when necessary, and make do with devices that they already own.

This analysis seems simplistic, but I am not sure that it is wrong. What do readers think? Is someone who buys local food at high prices hastening the destruction of the earth?

[Obviously there are other reasons to buy local food, such as taste, but this posting is purely about environmental damage.]

Philip Greenspun’s Weblog

Aggressive-Defense Cycles

The markets cycle between periods that favor rapid profit production, and periods when it’s hard to put a single dime into your pocket. Low hanging fruit, public participation, and a balance between buyers and sellers characterize the aggressive phase of this cycle. Whipsaws, traps, illiquidity, and an absence of buyers and sellers characterize the defensive […]

Macro Month in Review/Preview August into September 2012

Written By: DragonFly Capital

Last month in this space my Monthly Macro Review/Preview the monthly outlook suggested the upside for the US Dollar and US Treasuries would continue while Crude Oil and Gold looked to consolidate with Gold biased lower and Crude Oil higher. Copper looked like Gold, consolidating with a bias lower while Natural Gas was biased higher but at resistance. The Shanghai Composite looked to continue to move lower while Emerging Markets consolidated and the German DAX looked to continue to move higher. Volatility looked to remain stable and low. This backdrop supported a weaker Equity Market going forward, but the relationship between Equities, and Treasuries and the US Dollar Index, has been moving in a correlated fashion, not as expected. This could continue of course until it does not. The point was to be aware that the current correlation was not normally expected. The charts of the Equity Index ETF’s themselves showed that the SPY and QQQ were set to move higher with the QQQ the strongest. The IWM appeared to be ready to consolidate gains. How does an additional month impact the longer term picture? Let’s look at some charts.

Dragonfly Capital

Monetary Policy Lower Bounds

I will probably publish a much longer post after I edit out some of the rudeness.  This isn’t just convention season it is also Jackson Hole Monetary Conference season.  There is quite a lot of discussion of forward guidance, that is public statements about monetary policy in the medium distant future.  Many pages of it are in this paper by Michael Woodford. 

I will use the phrase as he does to refer to guidance regarding future safe overnight rates (the federal funds rate for the USA). He treats the direct effects of massive asset purchases separately.   Here I will pretend that the only thing the FOMC does is target the federal funds rate, so forward guidance means statements about what the target will be a few years from now.  I will assume that the Fed surely can’t precommit beyond Bernanke’s current term that is roughly beyond the next 5 years.  The guidance can be conditional.  It could be that the target rate will be below 0.25% until nominal GDP is within 1% of the pre-2007 trend (with a published estimate of the trend for precision).

The point of forward guidance is that even if the monetary authority can’t drive current short term nominal rates significantly lower (since they are already essentially zero) it can cause lower expected future short term rates.  The aim could be to cause increased mid term expected inflation.

The problem is that there is a zero lower bound for expected future interest rates.  Given my assumptions, all effects of forward guidance should show up in the 5 year constant maturity treasury interest rate series.  I note that bond traders pay obsessive attention to everything FOMC members say and it is very possible that the guidance will influence their beliefs, but not those of home builders, potential home buyers or even mortgage loan officers.

The current Treasury 5 year rate is 0.66% .  I think the outer limit of possible forward guidance would be to lower it by about 0.5%.  This, it seems to me, is not a big enough deal to justify the huge spillage of ink and killage of trees.  Things were very different fro mid 2009 through early 2010 when the rate was well over 2%.   It is obviously impossible to achieve so large a further reduction given the lower bound.  Yet advocates of forward guidance criticize the FOMCs effort.  They really couldn’t achieve as much again as has happened already (which past decline might not be due to forward guidance).

Another way to look at it is to try to guess about expected short term rates given the medium term rate (5 years as the limit of conceivably credible pre-commitment).  A way to summarize the information is to imagine a forecast of 0 until t then normal short term rates from then on.  The normal rate must be over 2% — no one can imagine policy setting interest rates below the target inflation rate indefinitely.  The yield curve slopes up (on average) although there is no decade long upward trend in short rates, so it is normal to assume a risk premium in 5 year rates.  Set it to zero.
Conveniently with miniscule interest rates over short periods of time compounding is almost exactly summing.  So the duration of the period of 2% in the next 5 years in the just to summarize calculation is 2% is 0.66*5/2 = 20 months.  The duration of the period of expected 0 rates is 3 years and 4 months.  Bond traders seem to expect essentially zero short term rates through December 2015.

Importantly the FOMC predicts (not promises predicts) extremely low rates through 2014.  It seems to me that bond traders take their prediction as a promise and then add a year. I don’t see how a cross my heart and hope to die and if I break my world all may know I am no gentleman promise could work any better.

Angry Bear

Proof: Foolish Thinking Produces Fools (by Mark St.Cyr)

As we head into the final holiday of the summer, I thought I’d make
my own final entry on the foolishness I see portrayed more often than I
dare try to quantify. It started when I was working on a project while
the television was on. (You can read part 1 and 2 here)

Here’s my current perception of how I see what “financial television”
has evolved into: Bloomberg® for flavor of the day financial banter,
CNBC® for comedy, and Fox® for soft porn. I mean it’s just ludicrous
what the so-called “financial” outlets have turned into. What’s next?
Someone pounding buzzers, whistles, and gongs as they give out 401K
advice to attract viewers? Wait…scratch that.

So as I wrote earlier we went from a story about a 10-year-old girl
flying alone, then to the commercial breaks where they went from hiring a
babysitter via the web to the final one that in my mind took the cake – literally!

Ladies and gentlemen let me introduce you to the wonder additive with
claims so powerful it would make P.T. Barnum blush: SENSA® Weight loss
Just shake this magic powder on that ice cream sundae and bammo! Forget
the treadmill, you’re in the 21st century now. You don’t diet to be
lean and mean. You now get to eat all that fat and cream. “Just shake, shake, shake!”

The commercial is all about showing (or claiming) the benefits of
this product by parading what looks like college age girls in bikinis
dancing on the beach as they eat corn dogs, ice cream cones, and more.
Although I’m all for girls in bikinis, who on this Earth thinks this is
how they’ll drop that VW® bus from their waistline so they can sign up
for the next beach volleyball tournament sporting a new suit?

Remember not that long ago when they were touting new potato chips
and others that were cooked with a “special additive” that allowed you
not to worry about the grease? That product had a funny little side
effect that wasn’t touted with such fanfare as the benefit of being able
to eat greasy foods without caring about adding pounds to your
waistline. It just added stains to – well let’s just say you wouldn’t
want to be on the beach jumping around sporting a new white bikini like
they do in the SENSA commercial.

I can’t help but ask myself just how many people are watching this
and will actually make the call and order it. They’ll justify it within
their head it must be safe because the government must have done tests
and more. They’ll say to themselves; “Well obviously this must be a
reputable company or product. Just look at the quality of the
commercial. Doesn’t look like it’s shot by some fly by nights. So they
must have some history that people are getting results or they’d be shut

I don’t want to imply that this company isn’t legitimate or legal. I
just want to bring to light what we’ve seen on similar venues when it
comes to products that just make you shake your head and say: “Who is buying this?”

Case in point: Remember Smiling Bob? He was the star in those slick
commercials that were seen on near every financial channel and more day
after day, after day, for months. The product was Enzyte®. the male
enhancement miracle pill.

The believers in this crowd run in tandem with the “I can eat anything and still lose weight”
believers in my opinion. Problem was they found out later the Enzyte
pitch was just a scam to get you on a recurring billing cycle. A scam
which resulted in the founder being sent to prison for 25 years. But
they sold millions, and millions, and millions, of dollars worth of
product before they were finally exposed. Literally one could say, but
without the smile I’d wager.

There are just parts of life you can’t escape the grind of. Raising
kids, staying fit, living healthy, growing your business, taking care of
your money. All of these things are parts of life we truly can’t just
pass off to someone else or take some miracle pill for.

There are at times no easy answers or pleasant ways to do all things.
And the more we look to jettison what we really should be doing for
ourselves or flail away in some vapid attempt to have our cake and eat
it to. The more we’ll find ourselves wasting precious time and resources
on foolish things we should have never taken a second look at.

Raising kids is tough but worth the price of trying to do it
correctly. Diet and exercise is hard, but so is not having that extra
slice of pizza. If you want the extra slice you’ll need to do a little
extra exercise. And if you want to handle and grow your money for life
and retirement, you’re going to have to learn about money and markets
through due diligence. Not because someone yelled “Buy, Buy, Buy!” It’s all common sense.

So as we go into this holiday weekend just let me say it’s people
like yourselves that are more uncommon than you might think. Because
when it’s all said and done, you are the ones that take responsibility
for your own futures, finances, and families.

Enjoy your holiday. You
deserve it!

© 2012 Mark St.Cyr

Slope Of Hope with Tim Knight

What wall of worry? Implied Volatilities are low

If this rally is climbing a wall of worry shouldn’t there be more of a risk premium?

Many market pundits are calling the recent advance in share prices “The rally that everyone hates!” It seems apparent that many money managers are sitting on the sidelines, unwilling or too worried to buy into a market that seems to have many headwinds.  The European debt crisis is certainly not resolved, earnings haven’t been off the charts positive, economic and unemployment numbers are still depressed and I have heard there is a presidential election coming up.

So why is the VIX currently trading around 14%? Granted the 6 week rally is moving at a snail’s pace.  The SPDR S&P 500 ETF (SPY) 50 day historical volatility, showing the actual movement in the price of the stock is measured today at 8.25%!  However, with the market back at yearly highs, levels not seen since March, the low implied volatility, or the premiums charged for options and the skew charged for downside hedges may be really compelling.  Granted the futures on the VIX index point to a premium for future volatility, but given that the spot VIX is so low, those forwards are higher, but certainly not high by historical measures.  Also, looking at the implied volatilities for the ATM options in the SPY and the downside puts in the SPY may indicate an opportunity for transacting a low cost option hedge.

Those investors who are long the market already and are concerned about a potential selloff leading into the election might want to look at buying a portfolio put as a hedge.  The mechanics of the portfolio put is to purchase a put option on a broad based ETF to hedge your entire portfolio of stock exposure.  Looking at October options, they have 59 days to go to expiration, and though expiration Friday on October 19th will not cover thru the November election, the result of the election may become apparent to all in October.  Any surprise either way may be the catalyst for market movement.  The implied vol of the October 140 calls is about 15% and command a premium of $ 2.70 or 1.9% of the current spot of the SPY (142.25).  So for 1.9% investors can be long the market with a little less worry of a market selloff.  To determine how much exposure you currently have to the market use the Risk Viewer Tool on your OptionsHouse platform, where you can see the Dollar Delta exposure on the Greeks tab.

I suggest using the Beta Weighted feature to get an accurate measure of your exposure to the overall market.  On this virtual portfolio I have long stock positions adding up to 104,000 Dollar Deltas. To hedge a $ 100,000 position in the market, one would buy 7 put options.  $ 104,000 / current SPY price (142.25 * 100) = 14,225 = 7.3 options.  After buying the puts, you will still be long the market, but your downside exposure will be hedged.

Risk Viewer Source: OptionsHouse

What if you aren’t already in the market?

If you have not participated in the rally and fear missing out on more upside, using options here instead of long stock may be very attractive from a risk / reward perspective.  With premiums so low traders can use an In the Money call as a hedged way to get long exposure to the market .  Again, use the calculation to determine the correct amount of exposure thru options.  Options are levered instruments which can sometimes cause new traders to buy too much exposure relative to your investment portfolio.   Using the SPY again as a proxy for the overall market, you could look at the September 140 call to have upside exposure for the next 31 days.  This option is $ 2.25 in the money, and can be purchased at $ 3.50.  This premium paid is the maximum risk of this position while the upside breakeven is 145.75 in the ETF. Say you want to invest $ 50,000 in the overall market, again divide $ 50,000 by the SPY price to determine whether to buy 3 or 4 options.  Instead of paying $ 50,000 to buy the stock, you can have a hedge position giving upside exposure spending 4 X 3.50 X 100 = $ 1400!

To get a full description of these and other hedged strategies which you may wish to consider go to our webinar archive pages and view the Buy and Hedge Webinar sessions found here.


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