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What kind of inverse fund is Barclays’ new XXV offering?

Sunday, August 1st, 2010

We know that Barclays’ XXV is intended to be an inverse fund of VXX, but there is some confusion regarding what kind of inverse it will be.   Will it be the equivalent of shorting VXX, or will it be an inverse percentage fund—trying to deliver the inverse percentage moves of VXX day to day?   I’m hoping for the former, because the inverse percentage funds are inferior over the long term to the performance of a short style position, especially in choppy markets.   I’m sure the Barclays’ strategy is correctly stated its EDGAR filing, but smarter people than I have looked at it and come up with different answers.

With a whopping 10 days of data it looks like the shorts probably have it.   The percentage chart below has the sign inverted on the XVV results to make it easier to compare to the VXX moves.   If XXV is trying to be an inverse percentage fund its performance on the 26th and 30th was pretty poor.  On the other hand, it was pretty good performance in order to emulate a VXX short.

The second chart shows the difference in results between 100 shares of XVV bought on its first day of trading (19-July-2010) vs a simulated inverse VXX percentage style fund.

VXX vs XXV daily % moves, click to enlarge

VXX vs XXV daily % moves, click to enlarge

Comparison of a true VXX short vs XXV, and inverse % style VXX approach, click to enlarge

Comparison of a true VXX short vs XXV, and inverse % style VXX approach, click to enlarge

Posted in Advanced Topics, VIX, all | View Comments

CBOE adds more weekly options—and drops a few

Friday, July 30th, 2010

Looking at the 30-July version of  AVAILABLE WEEKLIES spreadsheet on CBOE’s weekly page shows that next week adds some interesting options (USO, CSCO, DNDN, GE) , and drops some that were offered the week before (ABX, POT, XOM).   Evidently the clever folks at CBOE are adding options for some stocks just for the week when they are reporting earnings.   I suspect that USO, on the other hand will be a permanent resident—one I plan to trade.

Posted in Options, all | View Comments

Recap on SPY weeklies —and some observations

Friday, July 30th, 2010

After creating a position with SPY on Wednesday at 111.07  I added to my covered calls on Thursday, buying SPY at 110.12, selling 110 strike calls  at 0.71.   At one point this morning (Friday) , when SPY was off to about 109.5 my 111 strike calls had dropped from Wednesday’s 0.83 to 0.08.   These strong moves are characteristic of options with only a little time left on them.   With so little premium left on these options I decided to close them out and hope the bounce happening at that point would continue.

SPY obliged, and when it reached the 110 to 110.1 range I re-established my short call position with 110 strike calls at 0.49.   This move capped my upside, but lowered my break even on that lot of stock from 110.22 down to 109.81.   I wasn’t optimistic that SPY would recover all the way back to 111 today, and I prefer to have my stock called away so that I don’t have any exposure to weekend events.

SPY closed at 110.27, so all my stock will be called away.  Most of my 0.375 / share profit came from the Thursday position established at 110.12, but I was pretty pleased to still make a profit on my Wednesday 111.07 SPY purchase—compliments of the small insurance policy provided by the call premiums.

I like the way that short term options provide a little cushion against contrary moves, plus generating respectable returns if the underlying goes up or sideways.  The option time premium eroding away gives me an incentive to stick with a position, rather than being tempted to take quick, small profits, or bail out when the market turns ugly.

I really don’t like the asymmetrical risk behavior of covered calls—it severely limits your upside, while providing only a small amount of down side protection.   The good news is that your overall time exposure on the weekly calls is short and if the market really turns ugly your (now) OTM calls will be pretty cheap, even with elevated IV,  if you decide to completely close out your position.

Posted in Covered Calls, Options, all | View Comments

Crossover

Thursday, July 29th, 2010

For the first time since late May the 2010 price of SPY has risen above the 2004 price for the same day.    Not much else to say except this latest rally does offer a little hope that we aren’t riding a bear trend into a double dip.

SPY 2003/2004 vs 2009/2010, click to enlarge

SPY 2003/2004 vs 2009/2010, click to enlarge

Posted in all | View Comments

Predicting the future: 27-July-2010

Tuesday, July 27th, 2010

I am an engineer by training.   It is in my blood to try to engineer a investment solution that gives good upside performance while structurally limiting risk to reasonable levels (e.g., no greater than the upside opportunity).   A few years ago I concluded that I had not figured out a way to do this, and that it is probably impossible.

For example highly rated bonds, usually not considered the riskiest of investments, are sensitive to prevailing interest rates.  AGG, a bond ETF is currently yielding around 3.7% annualized interest.  Its duration, a term that defines the average time until maturity for the bonds in the fund is around 4.    The duration metric quantifies how sensitive a bond investment is to interest rate fluctuations. Read More

Posted in Mainstream, all | View Comments

Dealing with risk — diversified asset allocation

Sunday, July 25th, 2010

Diversified asset allocation, the belief system that most investment advisors preach—has the “right”  mix of stocks, bonds, real estate, commodities spread out over the entire world.   This investor age dependent mix is rebalanced, typically quarterly, by reducing your investment in areas that have performed well and increasing your stake in areas that are now underweighted—presumably waiting their turn to perform.

I don’t think this is a bad strategy, but it does make the assumption that the future will be like the past (e.g., equities average around 10% growth per year over multi-decade periods, and that some assets classes like bonds and commodities tend to counterbalance trends in equities. Read More

Posted in Mainstream, all | View Comments

Playing the weeklies…

Monday, July 19th, 2010

Created a covered call position today with SPY at 106.89 and 107 SPY calls expiring this Friday–the 23rd.   The calls sold (to open) at 1.18, giving a 1.2% best case profit for the week if SPY closes Friday above 107.   Fidelity supports trading these weekly options, but apparently Schwab does not.

Posted in Covered Calls, Options, all | View Comments

A near miss on the 15th

Monday, July 19th, 2010

On July 15th the closing price of SPY was only $1.12 away from the July 15th, 2004 closing value of SPY.   The last crossover between the two price histories was in late May, but it wouldn’t take much of a rally to put 2010 on top again.

SPY 2010 vs 2004, Click to enlarge

SPY 2010 vs 2004, Click to enlarge

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The summer of 2010 grinds on

Thursday, July 8th, 2010

The last 3 days have provided a respite, but in general the market has not been kind to the bulls this summer. As in 2004, the 2010 bottom trendline has not proved to be a impermeable barrier–with a SPY close of 102.2 last Friday providing a convincing accent.   Six years ago the market reversed its negative summer slide starting in August–are we three weeks early this year?

SPY & VIX 2004 vs 2010, click to enlarge

SPY & VIX 2004 vs 2010, click to enlarge

Posted in all | View Comments

Weekly options for the masses–SPY, QQQQ, IWM, DIA and others

Wednesday, July 7th, 2010

Anyone that trades options knows that the pace quickens the last few days before expiration.   The delta (the change in option price relative to the underlying)  for the ATM option is still around .5, but instead of gradual changes for the deltas on the strikes in / out of the money, the curve starts resembling a step function, going from zero for out-of-the-money, to one for in-the-money at expiration.   The time decay of the option premium (theta) also accelerates, with perhaps 50% of the decay in the last month happening in the last week of the option’s life.

Taken from http://www.option911.com/blog/option-education/how-option-time-premium-decays-over-the-weekend/, click to enlarge

Taken from http://www.option911.com/blog/option-education/how-option-time-premium-decays-over-the-weekend/, click to enlarge

All of this is of course modulated by any changes in the volatility of the underlying, and the market in general.

Some traders avoid options close to expiration because of these factors–and others flock to them.    As a covered call writer I am really attracted to the accelerated time decay of short term options.   I’m not taking any more risk than normal holding the underlying, and I am getting an accelerated decay in the price of the options I am short on.    I will often wait until there is only two or three weeks are remaining on the options to create the position.

Now it can be expiration week, every week for the following Stocks / ETFs (taken from this CBOE posting):

Weeklys on Exchange Traded Funds and equities. As of July 5, 2010, these included the following::

  • SPY – Standard & Poor’s Depositary Receipts
  • QQQQ – Nasdaq-100 Index Tracking Stock
  • IWM – iShares Russell 2000 Index Fund
  • GLD – Options on SPDR® Gold Shares
  • XLF – Financial Select Sector SPDR
  • EEM – iShares MSCI Emerging Markets Index
  • C – Citigroup Inc
  • BAC – Bank of America Corp
  • AAPL – Apple Inc
  • BP – BP PLC
  • F – Ford
  • GOOG – Google Inc.

Fidelity supports trading on these new weekly options, but Schwab does not appear to.   Beware of the listed greeks on these options, the software may not be using the correct time until expiration.

The volume, at least on the SPY weeklies has been substantial (20K today on the 105′s expiring 9-July), so I think the options providers have a winner.

For more information see this options clearing house post.

Posted in Covered Calls, Dividend Capture, Options, all | View Comments

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