Order Of Magnitude » Uncategorized

Down week

wdevauld — Fri, 14 May 2010 17:43:18 +0000

This Friday winds up my worst trading week of 2010. The volatility after last week's interday plunge in the DOW seemed to have stayed in the currency markets this week. The Euro plunged to levels never seen before, as the world runs around worrying about where, if anywhere, is a safe haven for my money.

The whipsaw action seemed to always work against us, and we were stopped out on the majority of trades. This failed string of trades set us back a whole month in profit making. A week like this really drains on the soul, so we closed up early, and worked instead on consolidating trade activity for the last few months, to see if we can reflect and gain some insight for improvement.

So for the first quarter of the year, here are some stats:

Average Length of Trade:	1 day 21 hours 7 minutes
Average $ / win	$222.20
Average $ / loss	$316.54
% Winners	68 %
Most Successful Pair:	EUR/CAD
Least Successful Pair:	GBP/USD
Most Active Pair:	USD/CAD
Least Active Pair:	AUD/USD

The largest single loss I had was over $1k, and looking in the trading journal, I thought I was smart enough to not enter a stop, because I was worried about volatility overnight and being pre-maturely stopped out before the move was certain was going to happen. Mother market disciplined me for my arrogance.

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Ratio Prices

wdevauld — Fri, 02 Apr 2010 19:28:30 +0000

A feature that is incredibly handy on StockCharts.com is the ability to quickly generate charts showing the ratio between two tradable entities. By simply placing a colon (:) between two tickers or index symbols you can bring up a chart showing relationships between such things as Gold to Silver, Texas Crude to the USD Index, the S&P Large Cap to the USD Index and the European Top 100 to the Eurodollar Index. These comparisons let you remove factors when examining equities and determining hedges. For instance, if you believed that the demand for oil was going to increase, and you didn't want to get crushed by movements in the USD, then you could go long Oil, and hedge yourself against an adverse movement in the dollar.

This technique can be applied to vanilla equities. If you wanted to reduce Beta in your portfolio, and wanted to benefit on the growth of Apple vs Microsoft, you could a long position in Apple, and a position of equivalent size short in Microsoft. Then as long as the ratio between the two continues to grow, you've somewhat isolated yourself from the daily fluctuations in the market.

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Joy!

wdevauld — Wed, 31 Mar 2010 17:27:07 +0000

Google Finance is in Canada! Now TSX listed stocks can be compared, and monitored through the amazing portal that Google has created.

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Looking at AUD.USD ahead of RBA’s GDP numbers

wdevauld — Tue, 15 Dec 2009 19:59:30 +0000

We've been in and out of several positions on AUD/USD in the past couple of weeks. We slightly ahead in trading with a few excellent positions balancing out a few more that stopped out. Tonight the Reserve Bank of Australia is releasing its GDP numbers, and as a result we're analyzing recent price action to determine what plays, if any, we would like to make

On a longer term timeframe, the 55 day moving average is rising, and is recently above current trading at around 0.9133. The rising long term daily average points us towards only entering on the bullish side if an opportunity presents itself

There is also a loose symmetric triangle forming starting around the beginning of November. The triangle points to a price tightening inward towards 0.9125, which is close to the SMA(55) on the daily. We believe this tightening is foreshadowing an upcoming price move.

For a longer term trade, the recent lows around 0.8905 (Nov 2nd) and 0.8946 (Nov 27th) are important when determining a stop. Since we'd like to take advantage of the difference in interest rates, a longer term trade is in our favour, which leads us towards a 0.89 area for a stop to allow for more volatility. Allowing for more volatility will most likely result in a longer term trade where we can collect the interest difference.

Resistance has shown itself in the 0.9320-ish area a few times with highs at 0.9328 (Oct 21st), 0.9322 (Nov 25th) and 0.9323 (Dec 3rd)

Tightening in to hourly bars, it becomes apparent that the area around 0.9175 has been a source of resistance frequently in the last 2 weeks

Our plan is to watch smaller timeframes (hourly and 10 minute) if the price action moves towards 0.91. We will not purchase higher than 0.9125 and will maintain a 0.89 stop. This equates to 225 pips of risk worst case. We will calculate the position size so that this maximum loss will equate to no more than 10% of our available capital (Rule #1). If we maintain an exit at 0.9320, we are looking at 195 pips of profit. This 1.15 Risk to Reward does not meet our requirements for a solid trade.

If we decide to tinker and adjust the upward price target to the October high of 0.9406 (changes Risk/Reward to 0.8) , or move up our stop to the 0.9020 (changes Risk/Reward to 0.53) level we are just trying to justify a trade that was objectively thrown out. That said, the GDP news is a large chunk of fundamental information and if the real numbers beat the consensus estimates of 0.4, and the market starts to significantly move showing that the information is not yet priced in, we may entertain the higher stop of 0.9020 if the strength of the hourly timeframe is significant. Otherwise, we'll let this one pass.

[UPDATE: RBA's GDP disappointed @ 0.2 as opposed to a 0.4 expected value. The pair immediately shed 50 pips in 2 minutes while we were on the sideline]

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The Loonie is gaining against the Dollar

wdevauld — Thu, 23 Jul 2009 17:22:11 +0000

USD.CAD - July 23rd

Last night the Loonie gained a cent against it's southern neighbour. The recent gains can be attributed to the BoC saying that the recession is currently over in Canada, coupled with the march up in the price of oil. Difficulty is that as the pair moves towards parity, Canadian exporters start to feel pain, as almost 80% of all Canada's exports go to the US.

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Weighing in on FAS (and FAZ)

wdevauld — Fri, 24 Apr 2009 05:17:00 +0000

Financiers are crafty, and the creation of the rocket fuelled 3 times leveraged bull financial ETF and its evil twin the 3 times leveraged bear financial ETF, both products of Direxion Shares. These creations have taken over the investment world. Created just last year, already they are trading hundreds of millions of shares a day, putting them near or at the top of some very elite company.

A look at the prospectus of these funds, if the average investor goes that far, starts to bring some questions about, namely "seeks daily investment results, before fees and expenses, of 300% of the price performance of the Russell 1000® Financial Services Index" Hrmmm, before fees and expenses. Curiosity around the mechanics of the 3x leverage, kept me digging into these ETFs. If you are so keen you can download the daily holdings, and most of it is pretty dull. The majority of the list is just vanilla shares in companies included in the index, although there appears to be a lot less than the index itself contains. Now, the magic of leverage comes from the largest holding in the fund: RUSSELL 1000 FINANCIAL INDEX SWAP. By value, this instrument makes up 66% of the holdings.

The RUSSELL 1000 Financial Index Swap is a Total Return Swap and Direxion is pretty hush about the party (parties?) they are negotiating these swaps with. The ticket is that although these swaps give you tremendous exposure to their underlying without making you pony up the dough, they are no where near free; usually they reside a percentage point or two above the interbank rate. That cost, the cost of the swap, is what will gradually eat away at the value of these ETFs.

Ignorance will lead you to believe that since FAZ is bearish and FAS is bullish they should move inversely to each other. They do to an extent, but it is not truly the case. If you compare holding shares of FAS, and shares of FAZ assuming you bought at the open of the month, and sold at the close, you'd see returns like:

Month	Long FAS	Long FAZ
Jan 2009	-63.9%	43.5%
Feb 2009	-41.5%	12.7%
Mar 2009	22.8%	-69.8%

Now, nobody in their right mind would hold these funds for a whole day, let a lone a whole month, and this timescale does demonstrate the erosion of capital that is happening. Sure the upsides are multiplied, but the downsides are magnified even more, all because the swap that is underlying the fund is eating away at the value. If investors were rational, and you had access to enough capital you could just short equal values of each fund and wait for that overnight rate + premium to eat away at the value. Investors are not rational, however, and as these funds become more and more popular, more and more capital is made available to the manager to buy more swaps (and marketing).

With this knowledge in hand, why are these funds so popular? They are liquid, the spread is tight, and the leverage appeals to the greedy part of the human mind. If you are on the right side of the market, you can pull in 10 or more percent in a single day. These funds do this crazy dance, day after day. The average true range of FAS over the last 14 trading sessions is $1.51. With today's close of $7.85 the average range the fund's price moves is almost 20% of it's current price. That is a lot of volatility. Take a look at the option premium charts:

FAS - Put Premiums (click for larger)

FAS - Call Premiums (click for larger)

If you can magically get the price half way between the bid and the ask, you could sell a straddle at $8 for about $2.85, or the $7 straddle instead for a credit of about $2.90. That is a boat load of premium, because it is also a boat load of risk. Option strategies laid ontop of a financial instrument based on return swaps. Only disciplined traders who can execute within seconds of a movement should attempt to tread these waters, if you have a chance of being trapped in a meeting, or are not glued to your terminal, you'd be safer using proven strategies on a simpler financial index

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Equivolume: KIM

wdevauld — Tue, 02 Dec 2008 15:47:01 +0000

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Lesson Learned?

wdevauld — Thu, 13 Nov 2008 06:45:06 +0000

The greatest strength can be obtained from fixing the largest problems. In the usual retrospective look towards our past calls, we find that GGP and LVS have both been called out by our weekly scanner. Looking back at what we were thinking regarding General Growth Properties and Las Veags Sands we can't help but wonder if the aversion to volatility is keeping us from serious gains. Vegas experienced a burning short squeeze, although if you weren't sqeezed out the play, today, you would be profitable. With that in mind, we ran the scan again today, and un-surprisingly didn't find a single long play. The scanner found, disregarding our usual 'no financial' rul, the following short plays:

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Fear is in the Air

wdevauld — Tue, 21 Oct 2008 06:25:59 +0000

The VIX is a measure of near term volatility of the S&P 500 index. I got my hands on as much data as I could get my hands on, and manged to come up with this chart:

click for larger version

Now, it must be kept in mind that the method for calculating the index was changed in 2004. The new method expanded the basket of stocks to the entire S&P 500 instead of the S&P 100, the Black Scholes option pricing model was bounced for a proprietary formula, and more options were included instead of just those at-the-money. If you want all the meat, there is a very detailed white paper on the CBOE website.

The thrown about name for the VIX is the 'fear index', as it measures the implied volatility across options trading on equities. When the implied volatility is high, it means that option writers want a lot of money for their contracts, as no one is certain where the market is going. Normally, anything below the 15 level is complaicent and anything above 30 is considered volatile. There has been a couple of times previous to 2008 when the index poked above 45: Sept 28th in 1998, Oct 8th in 1998 and Aug 5th in 2002.

So far, 2008 has had the index close above 45 level 14 times this year. If the VIX is a fear index, then people are scared shitless. Heading into the end of option expiration week, the volatility index spent the entire 5 days above the 50 level, which is territory only found in 2008. It closed above 70, at 70.33 on Friday for a new all time high.

The volatility can been seen in more than the VIX. Average True Range for SPDRs over the last nine trading sessions is $9.15. Considering it closed today at $98.81 the average trading range is approximately 9% of the current price, daily!

For us, that means that options are priced incredibly expensive right now. Have a look at the put and call premiums for the front month:

Put Premium:

click for larger version

Call Premium

click for larger version

An at the money straddle would cost between 10.80 and 10.98 depending on if you went with the 98 or the 99 strike (using the last price of the day). Not unfeasible considering activity as of late, but it makes it very difficult to turn a profit buying these contracts. Recent market activity makes it dangerous to sell these contracts.

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Sept 16, 2008

wdevauld — Wed, 17 Sep 2008 03:55:08 +0000

Wednesday morning is going to be very busy. After leaving Lehman on the stake to be picked apart by the crows, the Federal Reserve has written an $85 billion dollar cheque to keep American International Group alive. The media spin, and press monkeys are priceless:

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

They can't repay their loans now; that is the whole problem. The debt they already have is secured by the assets of AIG. Why is this loan any different?

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