July 2009


snoopytyping_800x600

Just reading through some of Mr Lee’s blog entries, you know because that’s the type of sad bastard that I am. Again assuming after all his winning ways Mr Lee’s Hedge Fund is up to some $70M –

The Chart Addict says:
July 30, 2009 at 9:33 am
Massive position in FAS

The Chart Addict says:
July 30, 2009 at 9:37 am
Massive position in TNA

The Chart Addict says:
July 30, 2009 at 11:40 am
FAS was a 48% position, and TNA was a 50% position.

That was the definition of ‘massive’ and ‘crazy’ earlier this morning.

If I told people this at the open, people would somehow screw themselves up.

Reply

So 48% and 50% positions.

FAS would then be 607,155 shares at 09:33 or at 09:32 611,020 shares. Actual shares traded: @ 09.33 = 58,580 shares @ 09.32 = 102,612 shares traded.

TNA would then be = 981,767 shares. Actual volume was = 230,477 shares traded. If taken at 09:32 to allow posting time, then total shares traded was = 161,644. If we take from time of the post volume was only 84,192 shares traded.

So my question to Jake-baby is: do you actually subscribe to this bs? If you do why?

snoopytyping_800x600

cpi-2009-06

Looking at the data, certain conclusions can be drawn. Consumers are still demanding specific consumer goods and services. They are:

*Food & Beverages
*Apparel
*Medical care
*Recreation
*Education & Communication
*Other

Some of these goods/services are obviously inelastic, food and beverages being the highly obvious one. In an environment of high uncertainity, which describes most recessions, and this is the most severe since the 1970 – 1980 period, consumers cut back [save] as much as they can.

This leads the Keynesian economists to start worrying about the paradox of thrift, which describes a circular economy, which is an obvious fallacy. One firm does not search for oil, discover oil, drill for oil, pump oil, ship oil, refine oil, transport oil [again] utilise oil in manufacture of widget, transport widget, market & sell widget [assuming widget is a consumer good. If widget is a capital good, we can add further stages of production.]

So we can assume eight or more stages of production in a single consumer good. Thus, we have a ratio of 1:8 of consumer goods to stages of production.

Thus, in this case, the productive, or hidden economy is eight times larger than the consumer economy, yet GDP only accounts for consumer spending. Thus the Keynesian model is fatally flawed. By logical progression, if the model is fatally flawed, the policy response by definition is false. Thus further credit creation to support deficit spending is precisely the opposite response required.

The maintainance of prices within [or slight inflation of] the identified sectors illuminates the flow of stimulus credit that is flowing from the deficits created by the government. The money is currently flowing into the Welfare State via unemployment, medicare, medicaid, etc, is being spent, thus maintaining demand in these areas of the economy.

Also credit is flowing to the various banks, who are building their reserves risk free, courtesy of the taxpayer. As their capitalization levels again build, they will reach a point where they will start to lend again, thus re-inflating the credit expansion from a second front.

The singular problem with a credit expansion is that credit must continue to expand. If for any reason it stops, or is curtailed, the edifice as we have seen, shifts into reverse.

CURRDD_Max_630_378

fredgraph

Thus Bernanke’s thesis on the Federal Reserve plan to withdraw credit is disingeneous at best, an outright lie at worst. Once the Federal Reserve withdraws credit, or curtails further growth, the stockmarket crashes.

While the credit expansion continues, the stockmarket will continue to rally, confounding the bears, who intellectually are correct, but, in the market, that can be a fatal error.

Why?

The stockmarket represents capital. Capital in the presence of cheap money, rises in value in PV terms against discounted FV cash-flows. Until the Federal Reserve alters it’s stance on interest rates, and removes liquidity, the market will rally.

This is because when consumer prices remain constant, or even rise slightly, the profit margins for firms rise. Additionally the expanding profit margins encourage expansion of productivity, thus increasing profitability even further, due to the maintained demand via credit creation, and injection into the system via the Welfare State. GDP does not pick-up the expanded activity, as it only measures the final consumer demand. When money is saved, the expansion of productive stages is financed by the savings, and a commensurate fall in demand, which is accounted for via falling prices [increased supply/falling demand] thus maintaining profit margins. With credit expansion, increased profit margins drive unsustainable supply, requiring ever increasing credit expansion to maintain demand [stable or increasing consumer prices] and profit margins at the increased supply levels.

The converse of this stance is that unemployment will continue to rise. This is due to in contradistinction to capital, labour becomes more expensive. Only in an environment of high interest rates, will by comparison, labour become cheaper than capital. Thus you can have a booming stockmarket, with high unemployment, or lower unemployment with a falling market.

unemploy

3mT

spy

snoopytyping_800x600

Cover @ $91.75. The flippe-floppe continues.

snoopytyping_800x600

From sigmaoptions, this post appeared discussing mental competencies. In a first part response, I’ll look at the Greeks component. In the second, I’ll consider the actual neurological pathways involved, and why in this example, unconscious is a misnomer.

An illustration of this point came up on a discussion forum recently. The question was asked, can you be successful without regard to the Greeks? Various points of view were put forth, but the one that interested me was from an ex-institutional trader with decades of high level experience. He thought that Greeks were not necessary for simple directional strategies.

The Greeks in Options delineate mathematically characteristics of Options as they respond to the underlying asset class from which they are derived. Unless you are a pretty competent mathematician, they are not really intuitive, which is why prior to the Black-Scholes-Merton model, they were traded seat-of-your-pants style, as there were no Greeks

I had an interesting [now] experience with AAPL Options and their earnings, that was entwined with IV. In short, the IV rose prior to earnings, and dropped after earnings, which limited [seriously] the expected return.

Returning to the quote. Yes, an experienced [decades] trader would realize that IV would most likely ratchet higher, as MM sought to insulate themselves [gouge the retail trader] from a positive response to an earnings announcement, but calculating that jump in IV without a model would require some serious cognitive gymnastics.

From this trade you can calculate the IV was 44% on purchase [Black-Scholes model] The day after, I sold at approximately $158.00, IV had crashed to 27%, hence the selling price

This was a simple directional strategy. The strategy and direction both turned out to be correct, yet, the payoff was sub-optimal, due to the Greeks being manipulated. I was aware that it may happen, I knew the IV prior to taking the trade, and still got hosed after the MM dropped the IV.

Would our trader know, or expect a 50% drop in IV? Would he calculate mentally the fair price based on the Greeks for the Option? Would he have known that at purchase price, that gamma was at it’s peak, and would decrease? That vega was also at it’s peak and would decrease? Possibly. By looking at the bid/ask spread, you will get an idea. But he [trader] would be advised to consider historical volatilities in contrast to the current volatility. He might then consider, based on earnings being a one hit affair, that volatility being currently elevated, might well fall back to HV after the event. HV is not a calculation that can be visualised on a chart however. You can look at two charts and observe that one is more volatile than the other, but quantifying that difference is not visually possible. Therefore, consideration of the Greeks becomes a necessity.

How about Gaussian distributions? ITM at 48.7%? Probability to expire worthless at 51.3%? Probability price between $155/$160 at 13.8%? Which is counter-intuitive to the high IV.

My point is this. It is unlikely that even trading a basic directional strategy, that knowledge of the Greeks is not required. Additionally, calculating the Greeks is hardly mental math. Thus, trading without consideration for the Greeks which seems likely, can be successful, but you may take trades that are potential horror stories waiting to happen unless you perform some analysis.

snoopytyping_800x600

Obviously I have a death wish, selling SHORT Gold @ $91.83

gld

snoopytyping_800x600

Gold has been a very frustrating asset class to try and trade. Almost invariably, I’ve been wrong. So, in a fit of pure optimisation, I’m switching to a different timeframe [12mths] to try and time Gold more successfully than I have been. Therefore, on any strength, I’ll be looking to get SHORT at least into the dog-day’s of August

snoopytyping_800x600

flippe-floppe-flye has gone to Disney World [how apt] His blog however has been taking a real shellacking.

The Fly
■Setting Up For a Beatdown
(2 days ago) · 27 comments
■More Cash
(2 days ago) · 20 comments
■You Will Die Without “The Fly”
(3 days ago) · 51 comments
■You Are Cordially Invited
(4 days ago) · 34 comments

This is MASSIVELY down to third tier levels. I know flippe-floppe is inordinately proud of his stats, as he boasts of them periodically. The proletariat seem to have deserted him for ChartAddict who executes the hindsight trading thing even better than he does.

Featured Blogger: Chart Addict
■Ascending Flag on the SPX (4 hours ago) · 107 comments
■Extensive SPX Timeframe Analysis (2 days ago) · 125 comments
■CASH MONEY YA’LL (2 days ago) · 124 comments
■SOMX Kill / SPX is up +44.3% from March Lows / New Consolidation zone (950-1000) / ETF Sector Analysis (5 days ago) · 115 comments

This is a development that I’ll keep an eye on as there could be a putsch in the making here.

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