Archive for January, 2009

Some reasons to sell Amazon puts right now

Tuesday, January 27th, 2009

- Debut of Kindle2 is yet to be announced

- Ebooks are finally taking off.

- Kindle sales is starting to have small material impact on revenue, as the digital inventory is reaching a tipping point

- Cloud Computing is the next big thing (if ebooks arent)

- And, urbanization trends are still clipping along, reducing delivery time.  One more reason, to shop online.

Anyway…for this quarter, I’m selling the $50 July Puts, for all the qualitative reasons I just mentioned, absolutely zero quantitative reasoning, and because this chart says I should be selling volatility.

Amazon Options

…I really don’t mind owning it at 40 and change.

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More Certainty in Gold than Oil

Monday, January 26th, 2009

Reflecting on the post by Gregor, where he noted that gold was buying too much oil.The option market seems to think, that there is more uncertainty in the price of oil, than gold. Oil Gold Volatility I’d like to point out, that plotting them on the same graph, has very little value.It’s the range where they currently sit, relative to their historic respective highs and lows.Oil is off ~20% off it’s highs, while Gold is off ~40%.  Oil’s IV is 2x higher than its low, while gold is sitting at only 1.75x higher. 

Posted in Gold, Oil, Volatility | Comments

Roubini’s hot hand blows up in 2009

Friday, January 23rd, 2009

“Global equities will fall 20 percent [~650 on S&P] this year from current levels” – Roubini

What a statement. 

He might be right, because he’s got a hot hand, is well educated, and people are listening to him.  But there are 11 strategists just as educated, forecasting a target of 1050 on the S&P by year end.

But for him to say something WILL happen, is ridiculous.  How does he know what people will be paying for a dollar of risk? What the market has priced in.  What the market will price in.  What will the market be paying for a dollar of equity exposure?  More importantly, how does he know what investors will be paying for 2010 earnings, at the end of 2009?  Seriously 7x or 9x forward, huh Roubini?  It’s one of the hardest things about wall-street.  Even if you can predict operating earnings, you don’t know what the street is willing to pay for it, and what future earnings is being priced in.

I’m calling the Roubini bubble pops, in 2009.

Only person in the world, who knows what WILL happen, is my mother.  Not yours, mine.

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Options on Twitter

Thursday, January 15th, 2009

I’ll be using a code, on twitter, for options dialogue.  Since, all my followers are the smartest people I’ve met, I likely don’t have to explain it.  But, incase anybody has any better ideas…well, chime in.

Template Option # 1————————————-

$AAPL###XMMMYY  …where X = C/P, ### = strike, MMM[12] = {JAN, FEB,…}, YY = Year, yes, we won’t be Y3K compliant.

- Not stating YY, assumes current year.

- Not stating MMM, assumes front month and current year

Template Option # 2————————————–

$AAPL###X##…where ### = strike, X = C/P, and the second set of ## = number of front months out

So, 99% of the time, people should choose #2, and you’ll see users tweeting this:

$ABC25C, $ABC35P2, or $ABC45CMAR …cause the front three months are the most actively traded.

Where strike is a decimal number, um…I’ll put the decimal, for now.

…and it’s not something option traders HAVE to use, it’s something they CAN use.

I think it should work…whether stocktwits.com wants to do anything with it or not, that’ll be up to them…

Posted in Leading | Comments

And there it is, Nikkei vs 10 yr

Sunday, January 4th, 2009

Nikkei vs 10 yearclick to enlarge 

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Posted in Economics | Comments

Path of the Planet

Saturday, January 3rd, 2009

This post will come as no surprise to Engineers who have studied controls, or to others like Nate Hagens and Gregor Macdonald.  But, looking at the earth like a multi-variable-non-linear system, with feedback loops designed to keep her in equilibrium, have been struck by the equivalent of a delta function it has never felt before.

Population

See, when engineers go to model a problem, in order to create forecasts they use an impulse, or a step function, then measure the response.  For linear systems, these responses are additive.  That is, to create a forecast for what would happen if there were two impulses, you can simply add the two responses together.  This gets extremly math intensive, and “convoluted” would be the best appropriate pun, but what happens to some systems is – instability.  Unstable systems don’t have the appropriate feedback necessary for the system to find an equilibrium, or they have feedback that overshoots, only to cause overshoot in the other direction.

Applying this to earth, in a crude qualitative way, what you get is things like supply and demand problems, extreme weather and extinction…because natural systems, will attempt to find equilibrium.  Anyway, below is the basic mathematical template that instability often embodies.  My theory is that between the law of large numbers, a growing population, and information continuing to flow faster – this is the path we’re on…I can’t prove it, but there are many signs that oil, water, and other variables will follow a more complicated path, but one like this:

Path

Posted in Engineering, Future | Comments

Buy-Write Bad-Wrap

Saturday, January 3rd, 2009

Now I know why the buy-write strategy gets such a bad wrap – idiots are running them.

Take a look at 2 years of data.

Buy-Write

It’s generally expected to underperperform in a low IV and/or strong bull market, but what were they doing during April and October of 2005?

If you’re running a buy-write, and the fund underperforms the underlying in a bear cycle…just put down the derivatives, before you hurt yourself.

To this “analysis”, I have two things to say:
1. If a buy-write is susceptible to consistently underperform, it does not do so on a risk-adjusted basis, otherwise there exists an arbitrage opportunity and/or an easy way to outperform…by taking the opposite bets. Heir go, vis-a-vie…

2. 2009 compared to 2005, will be very different, and 2013 will be even more so; the market will have more participants, smaller spreads, and higher effeciency. Any bid for a contract will continue to price in future volatility. That is, IV will approach the volatility that comes to fruition, as the markets get more effecient.

So…my hypothesis from #1 & #2, for any contract sold, will be done so, at a continually ever more “fair” price…going forward.

I put my Sony in charge of an IB account today. The algorithm I’m running is a less intense version of what I built and started running in the middle of the summer of ‘08. That one used leverage, up to 4x. That was, a big mistake going into October. It cost me, a pretty penny. This new one, uses what I call negligible leverage + a statistical probability model + a dynamic strike price selection + less active trading. It got long, SPY at 90.24 and wrote $99 Februaries.

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Behold…it starts!

Friday, January 2nd, 2009

What was it, like less than a week ago, when the online discussion steered towards getting all aboard an increase/creation of gas/oil taxes (depending on the state), and I said they just need to spin right way.  Well…ta da.

Posted in Economics, Oil | Comments