Unusual Activity in Financial Puts Bought for September

Yesterday there was strange activity in the out buying of Bank of America. A large number of fairly out of the money puts were bough for both August and September. For example, while the stock closed the day at $28.86, there were 60,000 August 25 puts traded. Those puts closed at roughly $0.13. In terms of $ spent, this amounts to approximately $780,000.00.

Where there is a buyer there is a seller, so could it be that the seller was a market maker trying to pocket the premiums as most options expire worthless. But to sell 60,000 puts still requires a major buyer, or buyers, in order to avoid causing a drastic drop in the value of the premiums. Maybe someone knows bad news are coming in the next couple of days, may be not. Because of the very short time to expiration (this Friday) the premiums are quite low. It is difficult to know what was going on.

This study instead focuses on the September puts in most of the financial institutions, as well as MCO and the popular XLF ETF. It looks at the total number of puts bought, at the out-of-the-money puts, and at the deep out-of-the-money puts traded today.

Total number of puts bought, as well as a rough estimate of the $ spent (based on the closing price):



The total number of puts traded is 288,928, for a $ figure of $59M. BAC puts are approximately $9M, comparable with MER and GS and XLF. This is also illustrated by the chart below:



Now let's look only at the number of puts that were out-of-the-money:




The total number of OTM puts is 208,639, for an estimated $ figure of $22M. BAC's share is now $5M, much higher than all the other institutions (except XLF itself).

Finally, let's look at the deep out of-the-money puts, defined as being more than 20% below the closing price.



This is where things get really interesting. BAC's share is now $1.4M out of the total $2M traded. The next one is MER with $147k. The following chart illustrates well the difference between BAC puts and the rest of the institutions:




You can see below the actual traded numbers for each strike price in AIG, AXP, and BAC.




Please click on the image to expand.

You can see over 19,000 September 22.50 puts and over 4,000 September 20 puts traded - today alone.

Max Pain Update

Yesterday there was a remarkable reversion closer to the max pain values. The current stock prices for DIA, SPY and QQQ were around 2-5% off their max pain values, now they are within 1%, and XLF is at 0.86%.

The max main values and the current differences with current prices are updated live (20-minute delayed) at http://nexalogic.com/maxpain.html.

This page also shows you how the theoretical max pain values have been shifting every day.

Max Pain Theory and Options Expiration This Week

Max Pain options theory tells us that the majority of options will expire worthless. The assumption is that most of the call or put options associated with an index or equity will expire worthless. To achieve this the underlying stock has to end the week somewhere above most of the open put options, but below most of the open call options.

Options expirations this month is this Friday August 15. With the big up move on Friday by the stock markets we will have a golden chance to see this theory proven right - or not - as current prices are significantly higher than what the max pain numbers.

Here are some max pain numbers, as well as the current price, and the price differential:

DIA: 114 (current: 116.95, +2.6%)
SPY: 128 (current: 129.37, +1.1%)
XLF: 21 (current: 21.94, +4.4%)
QQQQ: 45 (current: 47.32, +5.1%)

These are the numbers for QQQQ:



A more interesting example is DIA. The following table shows the number of options in-the-money and out-of-the-money, as well as the total $ profits that holders of in the money options could make.



This table shows the revenue that will be made by the options holders once they sell their ITM (in the money) options, not deducting the premiums paid). With Max Pain, there is a difference of $11M in profits. This means that holders of in the money options make less money, and the writers of the options make the most money. Notice also the number of OTM (out of the money) options at expiration. If Max theory is correct, the writers of the options will stand to keep 257,615 contracts, versus 234,388 if the current price stands. That is a a difference of 23,227 contracts. The table below shows the profits made by the options writers at several average premiums charged for these contracts.




Finally, the table below shows the actual profits made by the ITM holders at expiration versus the premium paid.



Note that at an average premium paid of $3.50 no ITM holder actually makes any money as the profits from their sales does not cover the cost of the options. At $5 premium the difference does not make sense as Max Pain theory benefits the buyers (fewer buyers, fewer losses!).

The figures in the two previous tables also clearly show that it its much more advantageous to write options as opposed to buying them. At, for example, $3 premium, the writers stand to make profits of $70M to $77M, while the buyers only make $7M to $11M.

If Max Pain is correct and if these numbers remain the same this week, the markets should correct. It will be very interesting to watch.

Correlation Between Oil and Natural Gas

Natural gas prices collapsed yesterday, dropping approximately 40% from their peaks. An easy way to invest in this commodity is through UNG in the US and through the HNU and HND ETFs in Canada. The Horizon's ETFs work very well in terms of not losing their value over time, as per extensive studies I have done, and are shielded from the drop in the USD, while UNG has the advantage of having options (calls/puts).

The following table shows the correlation among oil (through USO), UNG, HND, and HNU.



As expected, the correlation between HND and HNU is very high, and the correlation between UNG and HNU is even higher at 0.99, in spite of HNU being a 2X ETF. Of interest is the correlation between USO and UNG, roughly 0.89 since Jan 15 2008. This information is useful if you wish to diversify or hedge your holdings. In 2008 there is too much correlation between natural gas and oil.

The following table shows the correlation each quarter this year (Q3 being very incomplete).

Q1 2008: 0.90
Q2 2008: 0.95
Q3 2008: 0.93

Brazil's Newest Deep Sea Oil and Gas Exploration Platform.

PMXL-1, Brazil's biggest oil and gas sea exploration platform is in final construction stages. It will stand at 230m high (equivalent to a 70-story highrise). It will be capable of processing 15 million cubic meters daily and will start operation in Q1 2009. You can see a picture below (sideways, while it is being built). The platform is visible from the Rio-Niteroi bridge and it stands taller than the bridge.



The platform will operate in the Mexilhao field, in the Bacia de Santos area, off Sao Paulo's state northern coast. The platform is being built at a cost of $1.2B.

Ring Of Fire Report

A report on the Ring Of Fire is presently available HERE. The report shows market caps, claims, and chart prices. This is part of a much larger report that is being finalized.

The current market caps as of the end of the day yesterday are shown below.

Ring of Fire Market Cap and Claim Units by Company

Here is an updated table based on the latest area claim map of the Ring of Fire region in Ontario, where Noront made its discovery. This map shows new companies in the area. The tables below show them sorted by current market cap and by the number of claim units they own. Some of the players have appreciated significantly in recent days, including the top names NOT, BMK, FNC, PRB and FWR.

Market Cap:



Click on each image to enlarge.


Claim Units:

The Ring of Fire Players (Re. Noront)

Here is a list of the current market cap of the Ring Of Fire players, where Noront (NOT.V) made is significant discovery. There are several companies exploring in the area (e.g, Probe, MacDonald, Freewest, Fancamp and others). I am working on a much bigger report on these. If anyone is interested please send me a note.

All figures in $M.

Performance of ETFs and Indexes on Each Weekday Show Very Interesting Results

This article discusses the daily performance of a number of indexes and ETFs. It shows the performance on each weekday ( Mondays, Tuesdays, Wednesdays, Thursdays, and Fridays). The results are quite interesting as there is quite a difference for a couple of specific days of the week.

The table below shows the performance of the Dow30 (through DIA), SP500 (through SPY), XLF, EWZ (Brazil), XFI (China), and the SP500 itself. The SP500 closely follows the Dow30 as they are highly correlated (see our post on correlation).



(Click on image to enlarge)

If you guessed one of them was Fridays, you are correct. Fridays are very good days to go short, most likely because people do not want to leave money on the table for unexpected bad news on the weekend?). The Dow 30 has gone down on 19 out of 25 Fridays for the first half of this year from January 2 2008 to June 30 2008. The average daily performance on Friday was -0.69%. If you shorted the Dow index at the end of the day on Thursdays and sold it at the end of the following day on Fridays, your cumulative performance would have been -15.95%. In comparison, the total return for the 6 months was -12.21%.


Note also that since the start of the year Brazil gained 10.3%, while its performance on Fridays was a cumulative -7.19%.

As for the best days to go long, it is clearly Mondays, where the Dow has gained 3.88% in spite of what was clearly a bear market in this first half of 2008.

The table also shows the number of days with returns over +0.5% and under -0.5%.

The graph below shows the performance of the Down on each weekday. You can clearly see how people usually sell on Fridays, perhaps afraid of whatever bad news might come on the weekend.



The Excel file used is also available for your viewing pleasure.

Zenn has the Potential for Disruption in the Auto and Battery Industries

Zenn is a Canadian company that currently makes electric cars and sells them in the US. These cars may soon (calendar year 2008 according to its CEO on a recent BNN interview) be powered by a new type of battery, one that can be recharged in minutes and allow 400Km of travel in one charge, and whose batteries are significantly lighter too (10% of the traditional lead battery weight).

Zenn trades on the Toronto Venture Exchange, ZNN.V and last traded at $4.92.

In the next several weeks, a privately-held and ultra-secretive company named EEStor Inc. will release the results of independent third-party testing of its electrical energy storage unit. These units can potentially be used everywhere, from hybrid cars to laptop computers. EEStor has Zenn and U.S. defence contractor Lockheed Martin Corp. equity and business partners. Lockheed bought exclusive rights to use EEStor's power system for military purposes, while Zenn bought exclusive worldwide rights to the system for vehicles weighing up to 1,400 kg. They say they believe it is the "holy grail" of electric storage systems.

[Edited June 27 10PM to add links and information]

ETF and Index Correlation Study for 2007 and 2008

Following the note on June 13, I performed a new correlation study for several ETFs and Indexes. This study has a new twist. It examines how correlation varies over time.

The study shows the correlation between pairs of symbols. For example, the correlation between gold (through GLD) and oil (through USO) was -.18 in Q207, 0.91 in Q3 07, 0.92 in Q407, 0.73 in Q108, and -.25 in Q208. Numbers close to 1.0 and -1.0 indicate correlation (positive and negative), while numbers close to 0 indicate a lack of correlation.




These numbers are very useful to see the current correlations, to observe correlation cycles, and for hedging and diversification.

These correlation values have been plotted in two different graphs below. Q2 2008 data includes up to June 18. The spreadsheet used is also available for download here.





(Click on images for larger version)

Turning to GPS To Save Money on Oil

The US Postal Service has 200,000 trucks running daily. A $0.01 increase in gas means $8M extra cost annually. A $1 increase means almost $1B in extra expenses.

The USPS is turning to GPS to optimize routes, and save on gas. Similarly, other delivery and courier companies may - or should - increase their use of GPS.

Companies to watch in the chip GPS space:

Trimble, TRMB
Garmin, GRMN
Sirf Technologies, SIRF

http://www.aoa-gps.com/
http://www.ashtech.com/en/
http://www.eaglegps.com/
http://www.garmin.com/
http://www.lowrance.com/
http://www.trimble.com/

Gold's W Formation

Gold may be currently showing a W formation. W formations are typically very bullish. Keep an eye on the right side for confirmation. Click on the GLD graph to expand. Stochastics (below) also show that gold should be moving higher but the fast stochastics are rapidly approaching overbought conditions.

Fundamentally however, I believe gold should be going lower, at least for the early summer. It all depends on the time frame.

Noront, NOT.V, Currently On Sale

Noront (NOT.v), Fancamp (FNC.v), and McDonald's Mines (BMK.v) have been previously discussed here with potentials for very significant gains. NOT is trading today at 3.30 and can be accumulated at these low prices. Fancamp, on the other hand, is trading at 2.15 and is at a good price to be distributed. These stocks can be easily traded in and out with the objective of lowering your ACB (Adjusted Cost Base).

These stocks are highly speculative and volatile.

NOT: In (30%) at 3.31
FNC: Out (50%) at 2.15
BMK: Holding.

Investing in Argentina? This is Not the Best Time.

This is a little note to warn those investing in miners, or other stocks, in Argentina.
Argentinean debt is today higher than in December 2001 when the country declared a default/moratorium. Analyst are warning that a new default may be forthcoming.

In 2005 its debt reached USD$114B, which was 56% of is GNP, or $170B if counting the debt to holders who refused to swaps on the original loans. Martin Krause and Aldo Abram, economists, warn that if Argentinean credibility continues to fall the country will be at serious risk of not being able to meet its financials obligations. The country has lately been raising capital from Venezuela. However, the economists also warn that Venezuela will not be able to to continue rescuing the country (by buying the loans or bonds), so far $6B in bonds in the last 3 years. Argentina has been paying a hefty price (14% interest). In comparison, Brazil pays 5.4% interest on 10-years bonds.

Current Argentinean inflation is at 20%. With the current situation on oil and food prices, this may get far worse.

Correlation of the Major Indexes and ETFs

I did a correlation study of major market indexes and ETFs. Correlation is a wonderful tool to achieve diversification and for hedging.

The results are quite interesting:

346 trading day study (since Feb 22 2007):

DBA and GOLD: 0.97
GLD and FXE: 0.94
TLT and GLD: 0.90
SKF and DBA: 0.90
EWZ and FXA: 0.97
VIX and SKF: 0.76 (best correlation for VIX)

A number close to +1 or -1 indicates good correlation (positive or inverse). If you are looking for hedging, then buy negatively correlated stocks, or go long and short two positively correlated stocks.

For example, the above shows you that you are not diversified if you buy the Aussie dollar and the Brazilian market!

If you buying USO and need to hedge it for example, then your best for 346 days bet was XLF (-0.92).

You can download a full list for 346 days (since Feb 2 2007) and for 100 days (since Jan 21 2008).

The Perils of Shorting Bonds

It seems that now everyone has jumped on the short bond band wagon, i.e., short selling bonds or bond ETFs (such as TLT), or buying puts on these ETFs, or buying the inverse ETF TBT. The reason is the high inflation in the US that will eventually, perhaps sooner rather than later, cause the Fed to raise rates. Higher interest rates causes a drop in bond prices as the current bonds become less valuable.

Common sense warns that if everyone is on the same side of a trade, it is not possible to make money. Everyone cannot make money. Besides this general concept, John Mauldin mentions a chapter of a book by Luis Gave, "A Road for Troubled Times", in which he discusses the impending fall of the Euro. An oversimplification of the chapter is that since the advent of the Euro some European countries can no longer print money at will. They could print local currency, but cannot print Euros. As a result, their deficits are ballooning out of control. In fact, countries may go bust because they issued debt in Euros, which they cannot print. France's debt to GDP ratio has moved from 35% in Francs to 70% in Euros. These deficits are getting larger. Obviously this situation cannot last forever and something will break. Asian countries' currencies have also appreciated recently. This has caused spreads between countries to increase in Europe (the spreads between the strong countries such as Germany and the not so strong ones such as France or Poland. This increase in spreads causes all kinds of problems for the banks and puts pressure on their balance sheets.

The debt of these countries used to be top notch on the assumption that countries did not go bankrupt. This top notch rating is no more. So the big problem is for banks that invested in this debt, these loans were not marked to market.

Solutions are the elimination or collapse of the Euro (countries stop adopting it) with dire consequences for the European union, or the devaluation of the Euro. A devaluation of the Euro through lowering of interest rates will cause another flight to safety, i.e, to bonds.

How all this works out, and how it affect the US is yet to be seen. So far the ECB has firmly insisted that the rampant inflation is one of its top priorities, so lowering of rates is not being considered. The consequences of raising rates will be nefarious for certain countries. If the politicians have their way, this will not happen. The financial and liquidity crisis that affected the US is only starting in Europe, this time the problems are caused by governments whose debts can no longer be considered at book value. This will cause all kinds of mega loses for the banks.

Gave concludes that the credit crunch has started to make its way into Europe and banks will likely be reporting losses and write-downs, and investors will flee to the safety of bonds. We are in for very interesting times ahead, those shorting bonds should take this into consideration.

Brazilian ADRs Trading Hit Record in New York

The daily trading volume of Brazilian stocks on the New York Stock Exchange (through ADRS) hit a record $4.07B in May. Volumes have jumped higher in light of S&P upgrade of Brazil to investment grade.

It is interesting to note that this volume is actually higher than the daily at the Bovespa (Sao Paulo Exchange) itself ($3.8B).

The top traded ADRS are:

PBR, Petrobras ON $1.5B
RIO, Vale $1.1B
BBD, Bradesco $244M
UBB, Unibanco $166M
SID, Siderurgica Nacional $155M
GGB, Gerdau $128M
ABV, Ambev $68M

Other ADRs:

ITU, Banco Itau
SDA, Sadia
PDA, Perdigao


SDA and PDA are the top food producers, great companies for those interested in ag. markets.


Source: O Estado de Sao Paulo.

The US Peso

In light of inflation and currency depreciation, some people are calling the US Dollar the US Peso. The table below shows the USD versus the Pesos of the world, plus the CAD and Euro.

The USD has lost 6.5% on average against the Pesos since Jan 2007.

(obs. Cuban peso not shown as it is a frozen rate. )

Household Income Spent on Food

The US Department of Agriculture publishes a nice report detailing the percentage of household income that is spent on food for various countries. From the latest report, the countries that spent the least are:

1. US 5.8%
2. Singapore 8.1%
3. Ireland 8.2%
4. U.K. 8.7%
5. Canada 9.3%

Note that the US percentage does not include what is spent on restaurants or take-outs which is likely a significant percentage.

The countries where people spent the most are:

1. Azerbaijan 51.6%
2. Belarus 47.3%
3. Morocco 44.8%
4. Algeria 43.7%
5. Jordan 43.6%



In terms of per capita dollars spent annually, the picture is quite different:

Least amount spent:

1. Pakistan $18
2. India $141
3. Nigeria $168
4. Vietnam $169
5. China $207


Most amount spent:

1. Norway $3,591
2. Switzerland $3,040
3. France $2,776
4. Japan $2,768
5. Italy $2,765
18. Canada $1,994
23. US $1,848