Today I shorted Treasury Bills...

[tabs]

Originally Posted by Wayne at Pelican Parts

Thanks for all the replies everyone. It's obvious that there are a lot of smart people on this thread (jury's still out on me!). It will be interesting to see what happens. The bottom line is that this time in history is like none other, and irrationality is appearing to be everywhere. Those with the guts to make the good calls will be rewarded. The trouble is predicting the good calls without losing your shirt!

-Wayne

Your an asute investor. You do your numbers and come up with solid conclusions.

[trader220]

Why buy the ETF? Why not use options on the ETF?

[Vintage Racer]

Originally Posted by Porsche-O-Phile

Dump the HELOC and get a fixed.

I'd say dump the loans and be mortgage free.

If 2008 didn't show but one thing, it is that debt can bury you. I much prefer to loan money to other people than to be the guy paying interest. A guy with no debt can take more risk in the financial markets than a guy that owes money on a jumbo loan.

I paid cash for my house 22 years ago. I loan 40% of my money to American taxpayers (short term U.S. Treasuries and U.S. TIP bonds) and have the remaining 60% of the portfolio in blue chip (i.g., good balance sheet) dividend paying stocks.

There will be a day soon when I'll take more risk. In the meantime, I refuse to try to catch a falling knife, and I do not plan to be the pig that gets slaughtered.

[trader220]

Originally Posted by Vintage Racer

I'd say dump the loans and be mortgage free.

If 2008 didn't show but one thing, it is that debt can bury you. I much prefer to loan money to other people than to be the guy paying interest. A guy with no debt can take more risk in the financial markets than a guy that owes money on a jumbo loan.

I paid cash for my house 22 years ago. I loan 40% of my money to American taxpayers (short term U.S. Treasuries and U.S. TIP bonds) and have the remaining 60% of the portfolio in blue chip (i.g., good balance sheet) dividend paying stocks.

There will be a day soon when I'll take more risk. In the meantime, I refuse to try to catch a falling knife, and I do not plan to be the pig that gets slaughtered.

Most people don’t have the cash laying around to pay for the house, in fact very very few do so that’s moot point. As far as 60% in blue chips, well blue chips got smoked in 2008. I would say that if you can get cheap money in fixed mortgage you’re better off taking the money now and working to beat the fixed rate you’re paying over time and its like not paying interest at all.

Dividends are nice except when the stocks fall by a much greater amount then the div paid.


Credit and debt are not bad things, it depends on what kind and how you use it.

[trader220]

"Dividend-paying stocks, seen as a safer bet as the broader market deteriorates, have become a trickier play as some companies cut or eliminate dividends to shore up balance sheets.

At least 10 major companies have taken actions against their dividends this quarter as the crumbling economy puts pressure on earnings.
Oliver P. Quilla for CNBC.com"
NYSE Traders


http://www.cnbc.com/id/28996008
--------------------------------------------------------------------------------

[Hetmann]

Interesting discussion. Of course if you have any variable rate debt, I'd say pay that off first before the rate takes off.

[trader220]

The case to be made for a variable rate note is if you're 100% sure you're selling before its going to change.

[Vintage Racer]

Originally Posted by trader220

Most people don’t have the cash laying around to pay for the house, in fact very very few do so that’s moot point.

I'd then say that they spend beyond their means. The house I now own isn't my first one. I bought a small house (sold it for a profit), and then bought a bigger house (ditto), and then bought the house that I currently live in.

I'd guess that I've saved $500,000 in interest. Mortgage interest isn't totally deductible after you start making decent income.

I would say that if you can get cheap money in fixed mortgage you’re better off taking the money now and working to beat the fixed rate you’re paying over time and its like not paying interest at all.

What investment other than Treasuries beat mortgage interest rates last year? I know the S&P500 was down 37%, commodities got killed, and even corporate bonds were savaged. Once you lose this much in one year, it is very difficult to get back the money that could have paid off a home loan.

As far as 60% in blue chips, well blue chips got smoked in 2008.

That is true, but not one stock that own I has cut the dividend rate. I am still getting income taxed at 15%, and I can wait until the stock comes back because I have no debt.

Credit and debt are not bad things, it depends on what kind and how you use it.

That is true. A business owner can make money if he borrows money to buy a piece of equipment that earns a good ROR.

Nonetheless, 2008 taught us that most consumers do not have the intelligence to properly use debt. It also taught us that most banks do not have the intelligence to loan money to people that can pay it back.

After all, we would not be in this severe recession if this country had used debt properly.

[competentone]

Originally Posted by trader220

Why buy the ETF? Why not use options on the ETF?

Options could give more "leverage" -- and potentially higher returns -- but that leverage can work both ways and one can lose more money faster too. (The TBT and PST are double short ETFs, so they are giving leverage already.)

With the volatility as high as it's been, the premiums for options can be quite high -- but that can create good opportunities for those holding the ETFs, or stock, (like Wayne) to write covered calls against the positions and make some good percentage returns.

One could work a complex options position, but for the more average investor, keeping the trades "simpler" is sometimes best.

I like Wayne's short Treasury position (much better than getting long Macy's and GM!); now we just need to get him to buy some gold and silver (and palladium too).

[trader220]

Originally Posted by competentone

Options could give more "leverage" -- and potentially higher returns -- but that leverage can work both ways and one can lose more money faster too. (The TBT and PST are double short ETFs, so they are giving leverage already.)

With the volatility as high as it's been, the premiums for options can be quite high -- but that can create good opportunities for those holding the ETFs, or stock, (like Wayne) to write covered calls against the positions and make some good percentage returns.

One could work a complex options position, but for the more average investor, keeping the trades "simpler" is sometimes best.

I like Wayne's short Treasury position (much better than getting long Macy's and GM!); now we just need to get him to buy some gold and silver (and palladium too).

I am not talking about shorting any options so your risk is limited to only what you paid to leverage your long position synthetically in the ETF. The only time you get into a situation with options where you have unlimited risk is in shorting options.
Long stock, or in this case the ETF plus short call ( ie. Covered calls) is the synthetic equivalent of naked short puts and that’s where you have significant risk.
As far as a “complex” options position I would hardly call some sort of vertical call spread really complex and you could achieve similar long deltas.

Good thread going!

[Vintage Racer]

I didn't know there was a market for shorting options.

I thought a call option buyer paid a premium to the option writer. The buyer is betting that the stock (or commodity) was going to increase in value.

I also thought that a put option buyer paid a premium to buy a put on a stock (or commodity) from the writer. The buyer is betting the security will fall in value.

An option also involves leverage. A simple purchase of a 40-contract is a bet on 4,000 shares of stock. The writer can be covered if they own the shares or naked if they don't.

I've know a very few traders that make money by using straddles and spreads. I have never meet a person that had a vocation that wasn't trading options that ever made any money over a long period of time. After all, that person is competing in a zero sum game (for every winner there is a loser) with a professional that sits in front of a Bloomberg all day. That professional may be a quant expert with a degree from MIT. He probably has 12 computers calculating up to date information, and a staff with degrees from Wharton.

I also remember several years ago when a few mutual funds blew up trading options. I don't now know of a single mutual fund that does anything but use options occasionally (buying out-of-the-money protective puts on held stock positions). Anyone know of a pure option mutual fund?

The derivative trading business is profitable for the exchanges. I recently went long on NDAQ and NYX (they were down ~70% from their highs).

[jyl]

I'm interested in the exchanges because think OTC biz will be forced onto exhanges. Not sure how much trading volume that actually is, though. And not sure if CDS biz will be constrained. Any views?

[trader220]

Most mutual funds cannot use options as written in their own mission statement.
You can always short options, anytime you buy a call or a put, someone had to sell it to you and therefore they are short that option.

Options are not necessarily a zero sum game, here is an example. You buy a call option on XYZ from me. XYZ then goes up in price and your call option goes up in price. You sell the call option before expiration for a profit. You don’t have to sell it to me you sell it to the market. I am still short that call and xyz now falls in price and thus the call falls in price and then I cover it for a profit. Or, you buy the call from me and I am now short the call but I hedge with either another call or the underlying stock.

Spreads are simple ways to limit risk and many many many retial investors / traders use them to consistently add gains to their portfolio. Straddles are a lot different and I would say that if you simple buy a straddle or short a straddle and then sit and wait its not going to be easy to make money. Straddles are implied volatility plays (vega plays) they’re not buy or short and hold plays. Long straddles give you the ability to trade the net positive gamma buy buying and selling the underlying when it moves. Shorting a straddle also needs to be hedged accordingly when the underlying moves.

As far as the markets go, just about all the options markets are electronic these days which means the trades are just setting their pricing parameters and their computer is spitting out the bid and offer. They don’t really care where the underlying stock goes since most firms are running what’s called a dispersion portfolio where they trade the implied volatility in the options vs. options on other stocks in that sector or index options.

[widebody911]

Remind me again how this isn't just a glorified form of gambling?

Originally Posted by trader220

Most mutual funds cannot use options as written in their own mission statement.
You can always short options, anytime you buy a call or a put, someone had to sell it to you and therefore they are short that option.

Options are not necessarily a zero sum game, here is an example. You buy a call option on XYZ from me. XYZ then goes up in price and your call option goes up in price. You sell the call option before expiration for a profit. You don’t have to sell it to me you sell it to the market. I am still short that call and xyz now falls in price and thus the call falls in price and then I cover it for a profit. Or, you buy the call from me and I am now short the call but I hedge with either another call or the underlying stock.

Spreads are simple ways to limit risk and many many many retial investors / traders use them to consistently add gains to their portfolio. Straddles are a lot different and I would say that if you simple buy a straddle or short a straddle and then sit and wait its not going to be easy to make money. Straddles are implied volatility plays (vega plays) they’re not buy or short and hold plays. Long straddles give you the ability to trade the net positive gamma buy buying and selling the underlying when it moves. Shorting a straddle also needs to be hedged accordingly when the underlying moves.

As far as the markets go, just about all the options markets are electronic these days which means the trades are just setting their pricing parameters and their computer is spitting out the bid and offer. They don’t really care where the underlying stock goes since most firms are running what’s called a dispersion portfolio where they trade the implied volatility in the options vs. options on other stocks in that sector or index options.

[trader220]

Originally Posted by widebody911

Remind me again how this isn't just a glorified form of gambling?

You talking about the global capital markets in general?

[Vintage Racer]

Originally Posted by trader220

Most mutual funds cannot use options as written in their own mission statement.

I understand that most mutual funds do not allow options.

But some do allow option trading within their individual Prospective Agreements. I am just trying to determine exactly how many investors in mutual funds (and individual accounts) have enjoyed superior returns by investing in options?

We know the big players. They usually graduated from the Quantitative Programs (the lady in Paris, France is well known).

Please inform us to your option trading results over a number of years? Most importantly, we would like an exact summary of your profitable trades going forward.

I do not doubt for one second that you are very wealthy due to your trading of options. I'd just like a few forward positions that can help the rest of us to be profitable.

[trader220]

First of all I don’t waste time discussing money, wealth, returns or material goods on line when we can’t see each other’s accounts. I was being civil, you’ve chosen to not to be. Show me where I implied any sort of great wealth on my part?

As far as options go, I spent 20 years as a professional options trader, having had seats on three different exchanges and been an off floor member of one other.

There is no way to determine how many people have increased their own returns via options just the same way there is no way to determine how many people have lost money.
You may continue with your sarcasm and smuggery.

You have already stated you don’t believe people should buy homes with mortgages and I am not surprised to find this sort of attitude from you regarding options and the capital markets in general.

For the record, I am not a quant, I don’t have an advanced degree in mathematics nor a Ivy League education. You don’t always need those lessons to understand the principles of options.

[jyl]

In my experience, very few equity mutual funds will actively trade options. They will sometimes lend their shares to shorts, and sometimes to sell covered calls against them. But most equity mutual fund managers do not have the mandate or the experience/skills/systems for options trading. Same for most managers of institutional equity portfolios.

I think it is a shame. Being able to hedge an equity position, or simply market exposure, at certain times would be darned useful for us. But it has to do with inertia as well as client mandates.

[turbo6bar]

I've read the double inverse is only suitable as a short-term vehicle and not for long-term holding. I still ache from getting slaughtered in short-term homebuilder put options, so I'm not jumping in this game. I was right on the direction, but wrong in timing.

I believe your theory is correct, and you only need patience.

jyl, wouldn't trading CDS on an exchange create more problems with regards to market valuation? The swaps are probably being valued optimistically now, and I can't see how exchange trading would support those lofty opinions.

[Rich76_911s]

Wayne thought you might like to read this article:


http://www.bloomberg.com/apps/news?pid=20601103&sid=aryE4wUPBu9c&refer=news#

Fed Lacks Consensus on Treasuries as Yields Rise (Update1)



By Scott Lanman and Craig Torres

Feb. 9 (Bloomberg) -- Federal Reserve officials have failed to resolve an internal debate over whether to purchase long-term Treasuries, even as rising yields on the securities threaten to undermine the central bank’s objective of cutting borrowing costs for consumers and businesses.

Policy makers are instead focusing on a program to purchase $200 billion in consumer and small-business loans and on a plan to buy $600 billion in home-finance debt, according to people familiar with the deliberations.

Forgoing purchases of Treasuries may exacerbate a jump in borrowing costs for the government as federal debt managers seek to finance an unprecedented budget deficit. Benchmark 10-year note yields this week exceeded their level of Dec. 1, when Fed Chairman Ben S. Bernanke first talked about the option. That’s raised other borrowing costs, potentially delaying a recovery.

“The Fed will get a lot more bang for its buck by buying mortgages than buying Treasuries,” said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed economist. “We were kind of a little surprised when the Fed wanted to go down this route” in comments starting in December, Ryding said.

Fed officials are seeking other ways to use monetary policy to ease credit after cutting the benchmark interest rate almost to zero, completing more than 5 percentage points of reductions since September 2007.

FOMC Meetings

The debate over buying Treasuries has now continued for two meetings of the Federal Open Market Committee. The potential acquisition of government debt to help finance a bank rescue doesn’t appear in the minutes of the December meeting.

The FOMC’s post-meeting statement on Jan. 28 signaled that not all participants are convinced. The panel “is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the statement said.

That’s still a harder line than on Dec. 16, when policy makers said they were “evaluating the potential benefits of purchasing longer-term Treasury securities.” Bernanke said in a Jan. 13 speech that the FOMC will focus on the “potential” of the purchases “to improve conditions in private credit markets, such as mortgage markets.”

Fed Split

Richmond Fed President Jeffrey Lacker dissented from the Jan. 28 decision, highlighting a split between the Board of Governors and some Fed presidents on how to stem the credit crisis and revive economic growth. Lacker preferred to expand the money supply “by purchasing U.S. Treasury securities rather than through targeted credit programs,” the FOMC statement said.

Buying Treasuries would reduce yields on government debt, prompting a decline in rates on mortgages, corporate bonds and other types of borrowing, according to Lacker and some other policy makers.

Still, there’s no guarantee the purchases would work, given that cuts in the Fed’s main interest rate failed to pare costs for corporations and other borrowers. Also, money created by the central bank to buy the Treasuries may fuel inflation should the Fed fail to quickly unwind the purchases as the economy begins to rebound.

‘Higher’ Bar

“The bar is a lot higher than we thought,” said Brian Sack, vice president at Macroeconomic Advisers LLC, and a former section chief at the Fed Board. “The statement said they are going to employ all available tools and yet they are reluctant to use the tool that is most readily available.” The FOMC next meets March 17.

Rates on long-term Treasuries have climbed this year as investor hopes faded for a quick start to Fed purchases. The yield on the 30-year government bond was 3.70 percent today, compared with 2.68 percent on Dec. 31. The yield on the 10-year note was little changed at 2.99 percent.

Costs for home loans are also rising. The average U.S. rate on a 30-year fixed mortgage increased to 5.25 percent last week from 5.10 percent the previous week, housing-finance provider Freddie Mac said on Feb. 5. In the week ended Jan. 23, mortgage applications in the U.S. slumped by the most in 16 years as refinancing plunged.

Fed purchases of Treasuries would sustain demand amid speculation China and other nations may curtail their holdings in U.S. debt, said Bill Gross, co-chief investment officer of Pacific Investment Management Co., the world’s biggest bond-fund manager.

China Investment

China is the largest investor in U.S. government securities, holding $681.9 billion of Treasuries.

“To the extent that the Chinese and others do not have the necessary funds, someone has to buy them,” Gross said in an interview with Bloomberg Television. “It is incumbent upon the Fed to step in. If they do, that will be a significant day in the bond market and the credit markets.”

Investors were disappointed when the Fed didn’t announce plans to buy long-term Treasuries in its Jan. 28 statement. The yield on 30-year Treasury securities rose 17 basis points to 3.41 percent that day. A basis point is 0.01 percentage point.

“What are they waiting for?” said Mark Spindel, who invests about $100 million as chief investment officer at Potomac River Capital in Washington. “I don’t understand this resistance from the Fed. Mortgage rates are now beginning to rise.”

Corporate Borrowing

One index shows the premium for corporate borrowing costs over 10-year Treasuries. While the spread has narrowed to 5.19 percentage points since reaching a high of 6.22 points on Dec. 16, it’s still more than triple the average spread of 1.66 percentage points in the year before the credit crisis started in August 2007.

As of Feb. 4, the Fed had bought $7.38 billion of mortgage- backed securities, out of $500 billion authorized, and $29.9 billion of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks, out of a possible $100 billion.

The Fed plans this month to announce a start date for the Term Asset-Backed Securities Lending Facility, or TALF, to prop up the market for student and auto loans, credit-card debt and small-business lending.

The Fed will release minutes of the Jan. 27-28 FOMC meeting on Feb. 18. Bernanke will testify before Congress on Feb. 10, give a speech on Feb. 18 and provide semiannual testimony on monetary policy to the Senate and House starting Feb. 24.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net.

Last Updated: February 9, 2009 06:12 EST