Trade Naked » Economy

Dubai Drops Dow

Sat, 28 Nov 2009 01:28:16 +0000

Mohamed El-Erian CEO of PIMCO and co-CIO with Bill Gross talks about the Dubai Debt Crisis. The markets have gone up indiscriminately on liquidity alone. The money from the Fed hasn’t made it to the real economy so all asset classes went up. Dubai World needs six months to resume debt payments is an event that triggers a re-pricing of assets.

Asian markets were down 5% on the news but the S&P 500 futures were down 24 on Globex over Thanksginving, but today the damage was 19 points. So it looks like the market considers it contained.

What Does Freight Tell Us?

Thu, 17 Sep 2009 15:32:57 +0000

In yesterday’s video clips Warren Buffett said that he would look at freight tonnage if he could only look at one thing. Here Lee Klaskow discusses rail and truck freight flows. This really tells you what is going on with the economy. It is like counting cardboard boxes used by a manufacturer when you want to verify his production numbers.

Warren Buffett on the Economy and Lehman

Wed, 16 Sep 2009 15:24:31 +0000

Here Buffett discusses the economy, flat, no bounce yet and what numbers he looks at to evaluate the economy.

Warren Buffett talks about the busy weekend of phone calls when Barclay’s was trying to buy Lehman Brothers. He also talks about looking at the property and casualty business of AIG.

New Housing Bubble?

Wed, 19 Aug 2009 16:26:35 +0000

Robert Shiller co-creator of the Case-Shiller housing index, discusses the possibility of another bubble in housing. The market is pricing in a total of four percent rise in home prices in the next five years. Housing affordability is at a 40 year high.

Comparing now to the Great Depression, Shiller points out that when Roosevelt took office in March 1933 the stock market doubled in a matter of months and the bull market ran until 1937. But the unemployment rate never dropped below 10%.

Shiller has a new book where he discusses the importance of sentiment. It is Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Amazon link). All his books are interesting.

Cash For Clunkers

Tue, 04 Aug 2009 19:05:07 +0000

Autonation is the largest car dealer in the US. The head of Autonation says that auto sales have stabilized with the “Cash for Clunkers” program. But has that cannibalized new auto sales when the economy recovers? It has improved gas mileage, by ten miles per gallon, and air quality for the cars that it has taken off the road. Would the higher quality buyers coming in have gone to new dealerships in a few months? Maybe the program has smoothed car demand which would be good for Detroit.

Beans and Demand

Tue, 04 Aug 2009 16:03:53 +0000

The commodity markets show us the demand for inputs into the rest of the economy, so it is interesting to see what is going on in that substructure of the markets. Here, is a discussion of soybean demand inflated by China’s stimulus.

The Economy Ain’t Pretty

Wed, 08 Jul 2009 16:49:40 +0000

Here is David Rosenberg, former chief economist at Merrill Lynch. He left the raging bull and moved back to his native Canada. He is a very sharp observer, listen to what he has to say about U6 unemployment (16.5%), value of infrastructure spending on near term (nil), and how this recession is not an inventory cycle but a credit cycle.

Flat Consumer Sentiment

Fri, 12 Jun 2009 15:13:38 +0000

Consumer Sentiment with Recessions Drawn in

Consumer sentiment was 68.7 in May and 69 in June.

No change, really.

Consumer sentiment was lower in this recession tnan any recession on the chart except for 1980 – 81. Recently consumer purchasing was 70% of GDP. In the ’80s it was less than 65% of GDP. So the low sentiment numbers now are more important to the economy.

Trading Reality

Wed, 03 Jun 2009 15:42:27 +0000

I was talking to a salesman yesterday about trading options. I don’t know what he was selling or how he got my number, but I realized something interesting while we were talking. He asked me how I pick trades. I could only murmur something vague. There are a few things that I know about how I like to trade. One is that I don’t believe in any predictions. Are we still in a trading range? Has the market started a new leg up since it closed above 930? Are we in for a sharp drop?

I don’t know.

I like to think as far forward as options expiration, next one is 20th June. What is my best guess of what might happen until then and how can I make a few profitable trades.

I deeply respect people who can buy GE now and wait patiently for the economy to improve and GE to clean up its balance sheet and grow all its businesses. I can’t do it.

My last boss at Millennium used to talk to floor brokers all the time and ask them, Why is the market up? Why is it down? The stories they told him satisfied him. “Soros has split a large order among five brokers and it is getting executed …” Something like that.

Trading shows how well aligned I am with reality. I like models and finding and testing a trading strategy. But all trading strategies bother me. What is left out? What are the hidden factors that are really driving the profit in the strategy?

In an up or sideways market, you can do really well selling puts. It is simple, and with a little technical analysis and no news to move the stock, like earnings, you can get some comfort that the put will expire worthless. Also, you can use an options calculator to calculate the probability of success based on the historical volatility. That is comforting too.

In a down market selling puts will kill you. So you have to know the difference short term, until the next expiration.

Delta Neutral Event Trade

Tue, 10 Feb 2009 18:46:27 +0000

I put on two different delta neutral trades this morning.

The Event

Today, the new Treasury Secretary, Tim Geithner, was scheduled to speak at 11 AM about the economy. As an added bonus, the Chairman of the Federal Reserve, Ben Bernanke is speaking at 1 PM. Yesterday’s trading was flat waiting for his speech. The market thought it was important enough to wait for

The idea is that a spike up or down in the price will increase the volatility of the options, increasing their value. Also, if the price moves down, the volatility increases more. The problem with this trade is that the implied volatility of financial stocks is already high, pricing in these kinds of large moves.

I bought a straddle and a strangle on JP Morgan Chase. Here is how it works.

The Straddle

JP Morgan Chase closed yesterday at 27.28. .

So I bought a put and a call both with a strike price of 27. The call cost me $1.97 and the put cost me $1.76.

Total cost: $3.73

The idea is that the financial stocks will have the biggest reaction to Geithner’s speech.

The Strangle

To compare returns, I also bought a strangle, or combination, which was a 29 call and a 26 put. The 29 call cost me $1.01 and the 26 put cost $1.31.

Total cost: $2.32

These are both nearly delta neutral trades which means that they shouldn’t change in value as the underlying stock moves.

So why would I do this trade?

Chase has moved down $2 as of 1:30 PM which is a 7% move. Both puts are in the money and so are trading with a delta closer to 1. The 27 call is now out of the money and so has a lower delta than the 27 put, so what should happen in that the 27 put should gain value faster than the 27 call loses value.

For the strangle, both options started out of the money about the same distance from the stock price. Now the put is in the money and has a much higher delta than the call which is now more out of the money. So again, the put should gain value faster than the call loses value.

We will see how it all ends.