Tuesday, March 31, 2009

Investing in FAS and FAZ

FAS and FAZ are the 3X leveraged financial sector ETF run by Direxion. As has been pointed out on this blog on numerous occasions, these leveraged ETFs are horrendous instruments. Here is more proof.

The chart below shows what would have happened if you had invested $10,000 in FAZ and $10,000 in FAZ, i.e, in both the long and the short fund, for a total of $20,000.

(please click on image to enlarge).

$20,000 became $4.2k. The question is, where did the other $15.8k go?

Do not walk, run from these investments. You have better odds at a casino.

Now, at inception, apparently there were 20M shares for FAZ, and 200M shares for FAS. At launch prices, that is a total of $6.78B. Today's value is $1.46B.:

I cannot yet verify the number of outstanding or issued shares, but the cumulative return matches the one for the $20k investment. Now, at inception not all units were sold or placed, but that was the valuation. Nearly $5B were lost in valuation, that is a loss of valuation of approximately $60M per day.

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Monday, March 30, 2009

UCO Straddles Update

With UCO down 15%, anyone with UCO straddles can get out at a profit. Keep or ditch the calls, it is your choice! http://straddles.nexalogic.com/. UCO straddles maintain its 100% profitability ratio.

UCO is now at $8.25, right in the sweet spot between 7.50 and 9 strikes. Calls and puts are $0.45, just perfect. Computed with the StraddlesCalc tool:

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Gold, Silver, Miner Straddles

With gold and silver being so volatile lately, there are some straddles, prices as of 11AM today:




Note that this is much better played on the TSE:


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Friday, March 27, 2009

Natural Gas Investments

Natural gas storage numbers were released yesterday. Please note the red curve in the chart below.

Please note the red circle. If we get another injection in the next 2 weeks, the storage curve will breach the 5 year average channel.

The numbers were, simply put, awful. With an unexpected injection of 3Bcf reported yesterday, natural gas inventories took a sharp turn upward and are approaching the top of the 5 year channel. The price of gas near futures currently is $3.75. A 2 handle ($2) is in theory possible.

Here is the seasonality chart:

This is the price over the last 9 years:

UNG chart show below:

Note also that the seasonal nature of natural gas is changing as more gas is used for summer power generation. So further sharp price deterioration is not a given, but price increases seem very unlikely.

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Thursday, March 26, 2009

Options Comparison: 2X ETF Versus Underlying

Here is another comparison of the performance of options of 2X ETFs versus the options on the underlying stock. We look at XLF versus SKF for the period March 3 to March 25. During this period, SKF dropped from around $260 to $90, while XLF went up approximately from $6 to $9.20.


Move Percentages:

Picking a price in the middle of the range, SKF 150 puts went up 350%, while XLF 8 calls moved up 800%. The others are similar.


Now, if we look at the volumes, it is clear that XLF has signifcantly higher liquidity. This makes it much easier to buy and sell the options, and also reduces the spreads between bid and ask prices.

Once again, based on this study, it is much preferable to use options on the underlying stock, and not on the leveraged ETF. There is no corresponding leverage on the leveraged options. This, in addition to the immense risks of holding a leveraged ETF which have been discussed here so many times.

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Yahoo and Sandisk Straddles

With rumours of acquisition swirling aroud these two companies, here are a couple of straddles for them:



The Yahoo straddle is quite attractive requiring a maximum move of 12.6%and an effective move of under 12%. The SNDK starddle is very expensive. We shall see if this is an indication of things to come.

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Wednesday, March 25, 2009

Hedge Funds Managers Pay in 2008

According to Institutional Investor Magazine, While the world is a deep recession, the top 10 hedge fund managers took home, on average, a mind boggling $464 million each in 2008:

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Straddles March 25

UCO is trading at exactly $9.50. Here are the straddles:

Note the maximum move required is "only" 20%, which is fairly low for UCO. The actual move required is lower than this as there are still 23 days to expiration.

IWM is trading at 41.64. Here are the updated straddles:

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Monday, March 23, 2009

Straddles for the Week March 23-27

Here are straddles for this week.

At 2 PM UCO is trading at $10.

UCO Call 11: $0.60
UCO Put 9: $0.55

IWM is trading at $41.88

IWM Call 42: $1.04
IWM Put 39: $1.10

Remember that all the UCO straddles and strangles were profitable last month as were all the IWM early month straddles.

Please, as always, do your own due dilligence.

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Sunday, March 22, 2009

Interview with the President of Itau-Unibanco, Brazil's Largest Bank

Following on the Brazilian bank theme, Roberto Setubal, President of Itau-Unibanco, the largest Brazilian bank, with U.S. $ 632 billion in assets and iver 100,000 emp0loyees, gave an interview to the O Estado de Sao Paulo newspaper published on Sunday March 22. Here are some excerpts.

Mr. Setubal says the country will avoid a recession in 2009 and sees signs that the worst is over
Mr. Setubal denies negotiations to expand beyond national borders. "The priority right now is completing the integration of the banks". Cautious, he says that the worst of the crisis has likelypassed and says he does not believe in recession in Brazil this year. "I see growth close to zero, which is positive given the drop on the last quarter of last year."

What do you think about interest rates?

In Brazil, we have had a a distortion for more than 20 years: a savings account ("caderneta de poupanca") that is tax-exempt and has basic interest rates relatively high for the world's economy. If you want lower interest rates, somehow we have to review the remuneration of savings. There are several possibilities. We must be very careful with the legal issues. The way that seems most appropriate to address the problem at this moment would be to introduce income tax in investments above a certain value, say R$100,000.00 or R$ 200,000.00. If we use these values, probably 99% of savers will remain exempted.

If rates drop, will the banks have problems?

We have had high interest for many years. I always said that, as anywhere in the world, banks survive with any kind of interest rates. The difference is in the way results and revenues are achieved. Banks must be flexible to adapt to that. I see the Itaú-Unibanco prepared to lower interest rates.

What is the scenario of interest to the end of the year?

We can reach 9% or lower. In the future, we will feel like the economy reacts, but I think that is it ready for a rate below 10%.

Do you see recession in Brazil?

No. I see this year growth close to zero, which is a positive number given the drop in the last quarter of last year. We can have growth in the first quarter, which would be a positive surprise. Some indicators are responding well, for example energy consumption. The economy is showing signs that it has found a floor. Several indicators show that the economy is not going down a slope.

Is the worst over?

Possibly yes; it is not possible to make such statement, but there are signs that we may have reached the bottom of the well.

And outside Brazil?

That is quite different. The crisis is very serious. What happened in the financial system of developed countries had an unexpected dimension. It will take three, four years for the GDP of USA, Europe and Japan go back to previous levels. Regardless of this, the Brazilian economy can resume growth in 2010 and 3% is a rather reasonable.

Will Citigroup and Bank of America survive?

They will Survive. Clearly, the U.S. government is giving them full support to survive. They both have a very significant presence in the world, it is important that this government support continues.

How do you see the possibility of nationalization of banks?

The fact that the U.S. government has put capital in these banks does not mean that the intention is manage them, they are very complex institutions. The government's intention is to restore the financial system and get rid of this problem. It is more like putting out a fire.

Will this solve the problem? Some say we will see a new Japan forming (which took years to solve problems and faced long economic stagnation).

The government is moving towards a path and some analysts point to other paths. We have seen this week the Fed inject more resources in the economy. We are finally seeing proposals and solutions to the size of the problem. We may be starting to see the beginning of the end of the financial crisis, which means that the government can stabilize the financial system. Therefore, we have the expectation to see the resumption of economic growth in a few years.

How do you assesse a temporary nationalization of banks?

I am pragmatic. I do not attack or defend. If this is the best solution, then we should do what is best for the country.

If Itaú-Unibanco had operated in the U.S., would it have made the same transactions that caused these problems?

It would be very easy to say no and I would look good in the picture. Given the market conditions, we would have done something. Probably not with same the intensity that some banks did. Certainly we would not have been aggressive in the market. But when you are embedded in a market you do not see the risks. So it is very difficult to say that that we would get out unscathed. It is unreasonable to say that.

In what moment you realized that there was an irrational exuberance out there?

Looking today, the market in general, and the Fed, realized that there was something wrong. Alan Greenspan commented some years ago about "irrational exuberance". More recently, pointed to the "Conundrum", a mystery related to the very low long-term spreads. All of this indicated that there were problems. Nobody knew exactly where, but there were signs that something was out of place.

Some people have said that vehicle financing was the subprime of Brazil.

Do not have anything similar here. In Brazil there will be an increase in defaults, but nothing like the U.S. We are more accustomed to fluctuations. We see a new cycle of bad debt growth. But the banks are prepared to absorb this wave because, in Brazil, I do not see the economy going into deep recession.

There is a significant increase in defaults among small and medium enterprises, attributed in large measure to the lack of credit.

There is no lack money. The demand for credit rises when GDP is growing. When it falls, the opposite occurs. Moreover, with more uncertainty, banks are more selective in granting credit. Anyway, when we look at the volume of credit in the economy, there is an increase. Itaú itself in the last quarter (of 2008), increased the amount of credit offered by over 6%. In the first quarter, we grew our loans to small businesses. It is a weaker seasonal time.

Itaú-Unibanco is the largest bank in the country What is the next goal?

The integrattion of the two banks.

And how about the speculation about the Mexican Banamex?

Our priority at the moment is to integrate the banks. It is a mega effort integrating two companies of this size. We are very focused. This step comes before anything else. We did not make the merger to have the largest bank, but the strongest, with also more ability to make acquisitions outside Brazil.

Are there a lot of cheap banks on the market today?

Cheap banks is usually a bad bank. We want good banks. I do not see the opportunity to take risk to buy something uncertain. The crisis is long and the opportunities will not disappear quickly.

Itaú, Unibanco has about 100 thousand employees. Many are afflicted with the possibility of layoffs. What do you say to them?

We will not close branches, we continue to expand the business in some areas. We will be able to make the unavoidable cuts through natural turnover, intime and without pressure.

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Saturday, March 21, 2009

Investing in Sound Banks

For investors interested in financials and taking advantage of the upcoming plunge of the USD, The Economist has this to say today about Brazilian banks:

"Brazil’s banks may be expensive, but at least they are safe. None has yet been troubled by the world financial turmoil. That may be because their profits from everyday banking were so high that they had no need to take silly risks. It is also because bank regulation was tightened after several went bust when inflation was tamed in the mid-1990s.
As evidence that the market is open, bankers point to Spain’s Santander, which has a reputation for competing aggressively on consumer loans and mortgages and which is now Brazil’s third-biggest private bank. But Santander’s Brazilian operations are half as profitable again as its worldwide average. HSBC and Citibank have small operations in Brazil, which are doing nicely. One way or another, Brazilian banking seems likely to remain a profitable exception to the disasters elsewhere."

Brazilian ADRs in New York: : http://nexalogic.com/brazil.html
The Economist article: http://www.economist.com/world/americas/displaystory.cfm?story_id=13331179

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Friday, March 20, 2009

Max Pain for March: Busted Again

Note the final figures for Max Pain on SPY, DIA, and IWM for March options:

SPY: MaxPain: 80, price at EOD: 76.71 (difference of -3.39, or 4.2%)
DIA: MaxPain: 80, price at EOD: 72.74 (difference of -7.26 or 9.1%)
IWM: MaxPain: 47, price at EOD: 39.98 (difference of -7.02 or 14.9%)

Just like in February, MaxPain once again was not effective in predicting prices at the end of options expiration.

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Why UCO Straddles Were Profitable

Below you will find a chart that shows why every single UCO (oil ultra ETF) straddle or strangle bought this options expiration month was profitable. It shows you the prices paid for calls or puts at well-defined regions of the chart, with prices that represent local peaks and valleys. Every point between a peak and a valley would haver had a better or an in-between ROI
Actual results were posted on this blog throughout the month.

The charts shows IWM on top of each column, the calls for strikes 6, 7.50, and 9 on the left column, and the corresponding puts on the right column.

(please click to enlarge)

The chart hows the percentage increase only for one side of the straddle/strangle. The other side would still have some residual value left. Returns were also quite significant on some points. The last week is always the one to avoid, as it is too risky, but still some positions were profitable then.

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The Mother Ship

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Thursday, March 19, 2009

Straddle Play for Tomorrow

With IWM trading at $41.50, here is a play for tomorrow (prices as of around 2:30PM):

IWM 41 calls at .85
IWM 42 puts at .80

Note that it is an in-the-money straddle that cannot expire worthless on both legs.

With the expected volatility of OpEx day, it should be able to easily get out of this position at a profit, whenever or as soon as a swing happens either way (do not wait until the end of the day). Worst case scenario is IWM at 41.50 for a loss of 40%.

Here is what the ROI chart looks like as a function of IWM values:

(click to enlarge)

11AM and 1PM show the values if the positions are sold at those times as there will still be intrinsic value left on the losing side (estimates only).

EDIT March 20 1:40PM: The IWM 42 puts are trading at $1.57. With Max Pain much higher, this may well be a good opportunity to sell them for a breakeven position and let the calls ride for potential profit.
EDIT March 20 1:50PM: IWM at $40.30. The IWM 42 puts are trading at $1.70. Position is profitable.
EDIT March 20 2:00PM: IWM at $40.17. The IWM 42 puts are trading at $1.85.
EDIT March 20 2:10PM: IWM at $40.00. The IWM 42 puts are trading at $2.00.
EDIT March 20 4PM, final: IWM closed at $39.98, IWM 42 puts at ~$1.85.

The red circles below show how the positions ended the day, and where they had maximum profit:

(please click to enlarge)

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UCO Straddles Update

Quick update on UCO straddles, with prices as of 11AM today:

Again, all UCO straddles are quite profitable, including the last one which was a wild shot from last Friday.

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Wednesday, March 18, 2009

Max Pain for March and Straddles Update

Max Pain for March paints a decisively mixed picture. Here are the current prices as of EOD today, their respective max pain values and the difference between them:

Straddles Update as of EOD today:

A huge move today makes the IWM straddles even more profitable. These are at http://straddles.nexalogic.com/

Please click on images to enlarge

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Tuesday, March 17, 2009

Straddles Update March 17

[EDIT] Here is the update at 3PM, what a difference a few hours make. UCO straddles once again have been profitable. 100% of them have been profitable. My March UCO positions have been sold and I a moving to April 7.50P - 10C.


Here is the table as of 10AM. Note that we are leaving last weeks winners in the table for comparison only. Those big winning straddles should have been sold.

Kindly click on the images to enlarge.

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Saturday, March 14, 2009

Correlation Between Oil, Gas and Gold Stocks

This is another correlation study. In this case we look at gold stocks, natural gas stocks, and miners. Results are calculated with our StockCorrelator tool.

There are 6 charts below, covering each quarter of 2008, plus Q1 of 2009, and plus 2008 as a whole. Each represents the correlation between the two symbols on the row and the column. The cell s shaded in green when the correlation is either greater than 0.85 or less than -0.85. So green represents very good correlation.

Q1 2008:

(please click in images to enlarge)

Q2 2008:

Q3 2008:

Q4 2008:

Q1 2009:

Overall 2008:


The clusters of green show the clear correlation inside each group: miners are correlated to miners, and oil companies are correlated to oil companies. These groups are located at the top left quarter and at the bottom right quarter.

There has been a clear change since 2008. This table shows the evolution of each correlation for each quarter, and for 2008. "miners" refers to the correlation among miners only, "oilers" refers to the correlation aming oil companies only, "miners oilers" refers to the correlation between miners and oilers, and so on:

The most correlated groups in 2008 and in 2009 are the natural gas and the oil companies.

Note the correlation between miners and oil companies in Q1 2009 is near a perfect zero. This is the biggest change in correlation. Oil/natural gas companies and miners are the most uncorrelated groups in 2009.

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Straddles for the Week March 16-20

Here are the straddles calculations for this coming week.

(please click on images to enlarge)

Note that this is the last week before options expiration. Any plays on this week are risky and not for the faint of heart. Strangles should not be played too far away of the price of the underlying. Plays this week are in the high gain-high risk category.

The UCO 7.50-9 strangle above is shown more as of a curiosity. We have seen UCO move wildly in the past, but this straddle paying off is a long shot.

These are the moves required:

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Friday, March 13, 2009

Friday the 13th Update

Quick update on our straddles in play, with prices at EOD Friday:

(please click to enlarge)

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Thursday, March 12, 2009

Straddles Update March 12

UCO is up significantly today confirming the end of the USO rollover.

All UCO and IWM straddles now Profitable. Time to take some profits.

As of 2:20PM:

(kindly click to enlarge)

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Wednesday, March 11, 2009

New UCO Strangle; All UCO Straddles Profitable

This is an update at 3PM. With UCO taking a beating, once again all UCO straddles and strangles are profitable. There is now another attractive UCO strangle at 6-7.50. If the drop in oil was indeed caused by USO rollover, then this can do quite well on the upside. If not, and oil continues to drop, we are protected by the put. That is the beauty of straddles.

Note that the volume on the 6's is only 2, but there are 1,200 open positions so the purchase is feasible. The 7.50s have traded 1,270 contracts today and there are 5,800+ open positions.

Gasoline inventories were bullish today, drop higher than expected, yet UGA dropped. The reason for the drop could just be the switch from winter gas to summer gas. UGA seems more attractive than USO.

Keep in mind that USO holders will at some point realize the horrible instrument they are holding and may vote with their feet, unless the USO positions are being bought to keep the price of oil down on purpose.

Up or down? Straddles!

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UCO and USO, Prices Taking a Beating, USO Rollover Ends Today

Remember that today is the last day of the 4-day rollover of USO. As expected, the price of near term oil contracts took a beating and continues to do so today.

UCO is currently trading at $7.50, right on the sweet spot for straddles:

The 6-9 is very illiquid, high risk, high-gain. Please note the number of day to expiration.

Prices computed with the StraddlesCalc V2 tool at http://nexalogic.com/nexastraddles.html

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Straddles Update March 11 AM

Here are the straddles updated with prices at the open today:

(please click on image to enlarge)

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Tuesday, March 10, 2009

Straddles for The Week March 9-13

Here are some IWM and UCO straddles for this week.

Prices and premiums last Friday and Monday at EOD:

And the maximum moves required today at EOD:

IWM 34-35:

IWM 33-36:

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