Thursday, April 2, 2020

Risks of Legging In

Tom writes:

I was trading Iron Condors in the EUR/USD in 2008.

I had just started a new position and I got the calls on and the short puts, but the long puts didn't fill. It was the end of the day so I figured I would get them filled in the morning.

BAD DECISION

If you weren't following that currency pair, you might not be aware that the EUR/USD moved down seven standard deviations in a single day.

Because my long puts were not in place yet, I had a terrible loss.

I considered this a great learning opportunity. Here are a few lessons:
  • I vowed never to partially fill a defined-risk trade without the long puts in place again.
  • If I trade at the end of the session, I make sure I have no unintended short options.
  • I am more aware of the true risk I am taking. I don't over leverage SPAN margin.
  • I learned the value of having a portfolio hedge in place
See aeromir.com for more.

Tuesday, March 24, 2020

Bill Ackman Buys SBUX, LOW, HLT, BRK in $2.5 Billion Recovery Bet - Bloomberg

Bill Ackman Buys SBUX, LOW, HLT, BRK in $2.5 Billion Recovery Bet - Bloomberg: Activist investor Bill Ackman said he has made a “recovery bet” on the economy, investing $2.5 billion in equities, including upping his positions in several of his portfolio companies and reinvesting in others like Starbucks Corp.

Sunday, March 22, 2020

The Thinking on Closing the Markets

Coronavirus News: Philippines Is First Country to Shut Markets - Bloomberg: The Philippine stock exchange chief said he plans to reopen the $188 billion market on Thursday, seeking a quick resumption of trading after the country became the first to shut financial markets in response to the widening coronavirus pandemic.



We spoke to a savvy market veteran at TDAmeritrade last week, and he said he thought it was considered here, but that U.S. officials did not want to allow other markets to dictate our prices.  So the concept of market close in a nutshell:  either everyone stays open or everyone closes.  Since other markets wished to remain open, so did the U.S.

Saturday, March 21, 2020

Looking for the lows that no one knows: 2280, 2137, 1900, 1600, 800

A savvy market observer wrote yesterday that the Spanish Flu, 1918, took the stock market down 37%.  "And this isn't the Spanish Flu," he wrote.  He has turned bullish.  Is he right?  Too early?  Dead wrong?  No one knows.

So.  Let's do some math.

Our recent high came just a relative few days (and 100 light years of consciousness) ago @ 3393.52, Feb. 19, 2020.  Just 31 days ago.  What a difference a day makes.

19-Feb-20 3,380.39 3,393.52 3,378.83 3,386.15 3,386.15 3,600,150,000

A 37% down move would take us to 2137.92.  We've already come pretty close.

Two days ago, we saw:

18-Mar-20 2,436.50 2,453.57 2,280.52 2,398.10 2,398.10 8,755,780,000

We weren't around in 1918, so can't comment directly, but in this age of 24/7, instantaneous news, and infection, recovery and death counts posted in near real-time courtesy Johns Hopkins for everyone to see and mull over, and fear, this feels worse.  The near-nationwide shutdown....also "feels" worse, hard on the psyche.  How will freedom-loving Americans fare, being in solitary or near-solitary confinement for a couple months?  Time will tell.

And then there's the entire matter of not enough hospital beds, not enough supplies, risks to our health workers -- truly apocalyptic.  To go from fat and happy to thoroughly stressed out -- in just 31 days.

So.

To this observer, market will go lower than 1918-1919 lows, i.e., a bottom at 1600-1900, near 50% off (1696.76) to be exact, might absorb the horror.  For now.

Few things in our favor:
  • Most recover, though the "this isn't too bad" early descriptions seem to have fallen away
  • Death rates vary, but 1% seems average
  • Treatments being devised
  • Vaccine work being fast-tracked.
After it gets its footing back, the market will play "where the puck is going to be, not where it is.  So once the market senses the apex of the horror is already here or just ahead, (and things will get much, much worse in the next 14 to 28 days), engines will reverse hard.  They are variously talking about U or V shaped bottoms.

There will be a respite, but one perhaps with residual masks, gloves and "social distancing."

The real question comes in the fall. Spanish Flu took a toll in the spring, abated into the summer, and came back with a vengeance in the fall.  Is a similar fate ahead?  That might bring the market to three-digit levels, e.g., 800, a 75% decline.

In closing, nothing would please me more to be wrong about every word here, and that the situation miraculously reverses and in lightning speed.  To see so many suffering, and to fear that will be your own fate, is mentally wearing.

Stay safe, stay in, use the time as profitably as you can, keep faith and trust in the Lord, be of good courage, and here's hoping we all get through this together.....


Wednesday, March 18, 2020

History of the trading curb

Trading curb history from Bob Pisani, CNBC: It was 1997 and for the first and only time, systemwide circuit breakers shut the market before the official 4 p.m. close.