Leveraged Theta

- Bill Gross

…of CO2 in our atmosphere…as of April.

389.46 ppm as of April 2009.

387.18 ppm as of April 2008.

What are we going to do?

If I had to say, that I have two areas of expertise when it comes to trading, it would be asset correlations and volatility. They go hand in hand.

I had a discussion on the topic of correlation, with one of my best friends only an hour or so ago. I need to show him this chart. It’s the july oil contract, against the canadian dollar, both priced in USD.

Loonie Oil: I've drawn vertical lines, to show the lack of phase shift.

Correlation is instant.

It’s been a good month to be long the oil contango…

$0.50 to $4 in a month.

I’ve observed the curve’s fluctuations over the last years, I just never looked at an actual plot of two spreads. I didn’t know the ride would have had that good of a sharpe ratio.

…I’m finally going to be able to get my newsletter started. My newsletter is going to be mostly math based analytics, so I needed an easy way to publish content to PDF, directly from code. They, WebSupergoo, has developped a solution, ABCpdf 7, that filled my gap.  They have created a really powerful dynamic linked library for adding PDF creation functionality into .NET applications. I was really impressed, by the simplicity, and the functionality.  In a few weeks, or maybe a month or two, I hope to unveil an alpha issue. 

The analytics I’m planning on including in the newsletter include implied volatlity details for all four majour asset classes plotted against futures curves for both at the money options and out of the money.  I’m also going to include correlation details, realized volatility, money flow analytics, and plots of the different asset classes denominated in anything relevant except USD.  Adding to that, i’m going to include my 30 day outlook for each asset class on a two-dimension, 7 point scale.

It’s going to be great, and I couldn’t do any of it, without WebSupergoo’s PDF tools.

In a recent Economist, they estimated that Americans spend a total of 7.6B hours per year on their own taxes.  That’s 3.8M full-time worker years.  Too funny. By that measure, it’s 6 times larger, than the car industry.

For the first time in a long time, I’m writing my thoughts before I head off to work…we had a big pop in domestic government paper less than 24 hours ago…against the back-drop of a FED talking about higher rates…of course, the greek contagion is the worries causing the flight to “quality”…but THIS AM, we’re seeing traders unwind or speculate on the opposite… WHILE panic heightens in europe.  Normally, this would happen afterwards.  The interesting thing, is that government paper was a place to park capital yesterday, but in less than 24 hours we’re seeing that notion reverse.  Oil’s continueing it’s slide, and volatility is picking up, so I’m down big time this week so far.  Domestic equities aren’t selling off, yet. 

That’s the wild part.  It’s the disconnect. 

It’s as if, traders are acknolwedging 3 things simultaneously,

“1 – Panic in Europe is contained to Europe. 2 -This won’t hurt US capitalism, that much.3 - I changed my mind about parking wealth in US paper.”

Of course, this is as of 7 AM EST, and within 30 minutes all these observations could be out the window.

I’m leaning towards believing, that the treasury traders are calling the move yesterday over-done, as this Greek problem will be taken care of.  If  they are right, I think the only smart move for money left, will be to take oil back up $1.50 from here.  Currently sitting at $82 as I write, of course, panic, by it’s very nature is unpredictable.

30 year: Top, then sell off.

Equities: Sell off, then capitulate.

Commodities: Find support, then catch a bid.

…we passed 7 Billion people on earth.

I just happened to google the population of the world, today, found that site. Weird coincidence.

Anyway, we’re less than a decade from 8 B. 

Get long the flow.

Particularly enjoyed, Micheal White’s post.

But, please, start at the beginning.

Goal for 2011. I think I can.

I want, all the [intelligent] risk-averse, retail investors I know, to take a look at the new (to me) “vehicle”, if you can call it that, available through Interactive Brokers. They are calling them EFPs.

EFP – Exchange For Physical.

They are bundelling single-stock futures, with equities, into one trading instrument – and making these instruments screenable. I’ve never traded single-stock futures, or even known anybody who has. I don’t know, how liquid they are, but as far as I’m aware, they work like every other form of futures contract. For those who don’t know what a Futures contract is, let me explain. When you go to the furniture store, and put a deposit down, to buy a piece of furniture, to be delivered in the future, you’ve just initiated a futures contract between you furniture store. They are going to deliver your furniture, and you’ll pay them on delivery. This is how oil is traded. It’s how copper is traded. It’s how most things which are difficult to deliver, and even some things which are easy to deliver, is traded. So, if you owned a big stack of stock certificates, it might be easier for you, to trade a futures contract, in order to get rid of them. That’s a single stock futures contract. Now, say, you want to sell your 100 shares of GOOG, and the current bid is exactly $500. Assume you don’t need the money, for at least a month. You take a look at the single stock futures, and somebody out there is willing to buy 100 shares of GOOG, in 30 days, for $505. Maybe, they don’t have the money TODAY, but really want to buy some GOOG. You hit the bid on that contract, now you’re locked into giving them your GOOG in 30 days, in exchange for $505 per share. You’ve just made, 1%, in 30 days. Between now and then, GOOG goes up – they profit, GOOG goes down – they lose, you get your 1% for waiting. IB is bundelling, these single stock futures, and equities, into one bid and ask. So, you can buy that GOOG, and sell that Single Stock Futures, in the same trasaction – knowing exactly what yield you’ll get ahead of time.

Now, be aware, liquidity, will likely trap you in until expiry. So, be prepared to HOLD.

They are basically, allowing traders, to buy and sell liquidity and/or arbitrage the financing rates for lending equity. I think it’s a bid, for the industry, to reduce the rates paid to finance shorted equities – by allowing retail to get in on the action.

The yield you can earn, is right now, in the high single digits per year. It could even approach 12% to 15%, per year. A little low, for my tastes, but great for many people I know.

If you have any questions, leave it in the comment to this post, or contact IB. From what I can see, this definately makes far more sense than using a savings account. I can’t see a way, that your principle could be at risk – other than if you want to exit, before the expiry of the futures contract.

YES – if you’ve never traded futures, this post, will sound complicated to you. I guarantee, if you’re reading this blog, you can figure it out. I also guarantee, you’ll be impressed when you do figure it out, with how simple it actually is.

Please consult a registered financial planner, before making any investment decisions.