A Very Attractive Strategy on Oil

Oil prices are expected to move quite a bit in the next few days. Straddles and strangles could be considered. These strategies allow the investor to benefit if the oil moves both up or down. This page shows some possibilities for both USO and UNG (prices will be updated a few times during the day today):

http://nexalogic.com/strangles.html

Clearly the USO positions are very attractive. The first two positions require a move of around 9% to be profitable. With oil expected to either move to 130 or drop to 110 that will be achieved and surpassed. Given that we still have more than 2 weeks to expiration, there will be also residual value on the side of the straddle that goes wrong.

Looks very good, please do your due diligence.

UPDATE 3:50PM: Best strangle was:

93 puts: $4.20 x 12 = $5,046
plus
94 calls: @$4.15, *12 = $4,986

Total invested = $10,032

-------

UPDATE Tuesday September 2nd, prices, 10AM:

93 puts: $7.70 x 12 = $9,240
plus
94 calls: @$1.60, *12 = $1,920

Total amount = $11,160

Return on Investment: 11.1%

Correlation of the Most Traded Stocks in the US

Following up on yesterday's correlation study, here is a table of correlations of the most traded stocks in the US. This list contains all stocks whose 90 day Simple Moving Average of Volume multiplied by the closing price is greater than $1B.



Please click on image to enlarge.


NOte that GS (Goldman Sachs) is not correlated to anything else in any major way.

Stock Correlation Study: Oil, Gold, Currencies are Highly Correlated

This article shows a study of correlation on a number of stocks and ETFs. The correlation uses closing prices data since August 1 2008.

Correlation is very useful for hedging and diversification. An investor who wants diversification should always look at the correlation factor between stocks and should not buy highly correlated ones. Similarly, an investor who is looking at hedging long position should be looking at negatively correlated stocks.

The data is also useful for investors in registered accounts who cannot short stocks or buy puts. An investor who wishes to shirt oil for example, can simply buy UAUA as the two stocks have been highly negatively correlated.

Clearly, there is a large relationship between currencies and oil and gold. Clearly also there are very high negative correlations between the general markets and oil and gold.

Please note that correlation does not necessarily mean a causality relationship, but it does indicate that the prices march together.


The following table shows the high positive and negative correlations of over 0.85 (or -0.85):



(Please click on image to enlarge.)


The following table shows the positive and negative very high correlations of over 0.90 (or -0.90):



The following table shows the positive and negative extremely high correlations of over 0.95 (or -0.95):




The following table shows the list of positive correlations (<0.90) for each of the symbols:




Similarly, this table shows the list of negative correlations (<-0.90):




(Please click on image to enlarge)


Some of the data may surprise investors. Clearly there are clusters of highly correlated stocks. Please see the maps below, which show a graphical representation of the very highly correlated stocks (<0.95), green edges are positive correlations, red are negative:





And this is a graphical representation of the very highly correlated stocks (>0.90):

Max Pain Report For August 2008

This is a report of what happened at the end of options expiration.

The week started with DIA and SPY significantly off their Max Pain values, 3.3% and 2.1% respectively (please see the max pain live page). At the end of the week, these figures were down to -0.4% and 0.9%. This was quite remarkable. However, what also occurred is both stock prices and max pain values fluctuated. DIA went from $117.80 to $115.40 on Wednesday to $116.43 o Friday. DIA's max pain went from 114 to 115 on Tuesday, jumping 2 points to 117 on Friday. While the stock prices moved closer to MP, MP also moved closer to the prices on the expiration day.

The situation with SPY was similar. Stock price went from 130.71 to 130.57 to 130.17. Its max pain was steady at 128 all week, moving one point to 129 on Friday.

These changes throughout the week can be seen in the chart below, which shows the average difference between the stock price and the max pain value for DIA, SPY, XLF, and QQQ.



The following chart shows the final differences in $ (stock price - max pain value):



Clearly, max pain theory was correct this moth for DIA, SPY, XLB, and XLF. Clearly it did not work so well for XLE, GG and USO (energy ETF, gold miner and oil respectively, commodities which have suffered very significant declines in the last couple of weeks).

As for Max Pain theory, "one month a proof does not make". There seems to be indeed a magnet for prices somewhere. What can be said at this point is that Prices and max pain values do appear converge to each other.

In term of money and profits made. This was the situation for DIA at the end of the day on Friday:



This is what option writers made for several average premiums charged.



This is what the in the money options holders kept, and made, at the end of the day:



This was the situation for SPY at the end of the day on Friday:



This is what the SPY option writers made for several average premiums charged.



This is what the SPY in the money options holders kept, and made, at the end of the day:




These figures do not include the trades made on Friday itself, options buyers who cashed into their profits or any writers who simply locked into their profits by covering or buying back their options. The total number of options closed (which means open interest dropped) on Friday, as well as the $ traded is shown below:

DIA:



SPY:



It can clearly be seen that the $ traded on Friday were primary for calls: 68% for DIA and 76% for SPY. This makes sense as call holders do not want to exercise their rights (and buy a very large number of shares), but rather they just wish to cash into their profits by selling the calls.

The total $ value for SPY was $26M, again shared between buyers and writers. Since this constitutes a small fraction of the open interest $ we will add the amount traded for the calls to their profits. Remember this is just an estimate.

Therefore, at a $2 average premium, the DIA options writers made approximately $49M. The options buyers made approximately $27M . The SPY options writers faired even better making approximately $480M, while the options buyers made approximately $142M.

While these figures are approximations, it clearly pays to write options as opposed to buying them.


If you wish to track the max pain values for September, please visit the max pain page.

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).