- The Outrage!
I truly can’t believe people would stoop so low as to use Melissa Therriau’s likeness to imply she endorses certain products. But apparently, they do. MELISSA THEURIAU’S face is familiar to regular web surfers, but they are most likely to know her as “Karen” or “Amy” because her image has been stolen for use in […]
- Food For Options Thought
Lawrence McMillan looks at VXX, VIX futures and volatility in general in his newsletter, and draws these conclusions. Im not sure anyone really buys VXX and just holds it, but VXX can be a useful tool, despite the fact that it underperforms $VIX in bullish times. Note that VXX outperforms in a bearish market, so […]
- Expiration Pin Jamming
Well, we rarely go over pins these days. Quite simply, what doesn’t pin now? You have 1 pt. wide strikes in just about every ETF, and a host of individual names as well. Putting that thru the calculator, I find that nothing can close more than 50 cents from strike. You also have weekly expiration […]
- Comment of The Week And Blog-Related Thoughts
I just can’t let this one go. Jeez, “Mr. Professional Writer and Expert” – do you think you can learn some grammar, punctuation and syntax skills? I mean, really, “month’s” when the word “month” is not possessing anything? Next: “Similar to premiums of VIX over realized volatility, the cost of OTM puts vis OTM calls, […]
- MKM Morning VIX Thoughts
Some thoughts on where volatility goes, from MKM Partners. A couple of large trades in the CBOE SPX Volatility Index (VIX, 22.42) and iPath S&P 500 VIX Short-Term Futures ETN (VXX, 17.28) yesterday appear to represent the view that implied volatility will exhibit its historical seasonal pattern over the next couple of months. We disagree, […]
- Quadruple Witch Is Upon Us
Doesn’t get so much publicity any more. But hey, it’s tomorrow, Time was the mere mention of “Quadruple” and “Witch” together caused my skin to break out in hives…..well either that or a cat walking by. OK seriously, I have a piece up on InvestorPlace on what you need to know about Witches.
How much do you hate pennies?
I have long wondered how coinage could be produced at a cost that is higher than the face value and why it would persist so long. I cannot say that I was nearly as passionate about the topic…
Posted in Economics.
– September 17, 2010
The Bond/Equity Debate Continues
I would like to present one more little bit of information on the equity versus fixed income debate. There have been a few news items that warrant some thought, and they all revolve around the cost of equity versus the cost of debt. The fundamental cost of capital question is: “If I am a CFO at a large corporation, would I raise capital by issuing stock or by issuing debt?” Right now the resounding answer would be – raise as much debt as possible. When Johnson & Johnson was issuing the lowest coupon 10 year bonds in history, I was wondering why they did not just issue enough to buy back all of their shares.
It turns out that a few are starting to do just that….not repurchase all of their shares, but the same idea nonetheless:
From Barrons:
Bloomberg reported late Monday afternoon Microsoft (MSFT) is mulling issuing debt to boost its dividends and to repurchase shares whose price has languished for years, much to the frustration of its millions of holders. The stock responded with a 5% pop as the news crossed the wires minutes before the 4 PM EDT close.
Woolworths Ltd (ASX:WOW) has sold US$1.25 billion of senior notes, it says to refinance existing debt facilities and for general corporate purposes.The two-part sale consists of a US$500 million senior note issue and a US$750 million senior note issue in the United States bond market.Both are fixed rate notes and will be issued by Woolworths. In August the country’s largest supermarket chain announced an off-market share buyback to return $700 million to shareholders.
Norfolk Southern Corp.’s (NSC) senior unsecured bond offering of $250MM will mature in August 2105 and have a coupon of 6%. Fitch expects NSC to shift its deployment of free cash flow toward increased share repurchases.
And lastly, Mastercard doesn’t need the debt so they went straight for it with cash:
MasterCard’s Board Approves $1 Billion Share Buyback Following Stock Drop
Comments Off on The Bond/Equity Debate Continues
– September 14, 2010
Volatility Term Structure
Many traders find options to be exciting because of the implicit leverage within the securities – buy $500 worth of options and control a potential $120,000 investment. That is only one small aspect of option trading and it is a very limited viewpoint. Options are truly great because they provide an infinite number of investment strategies for those willing to look. One aspect often ignored is the term structure of volatility which is a view across option maturities.
An intriguing relationship can be found between long-dated maturities and short-dated maturities. Despite a rapid fall of the media-friendly VIX, longer dated options have kept their lofty implied volatility levels. If we focus just on one year and one month ATM options on the S&P 500, we can see how lofty that relationship is:
The term structure spread is historically wide
The spread between the 1 year option implied volatility and 1 month options is quite wide, but looking at the standard deviation is probably the wrong metric when looking at a risk factor with such fat tails. A better metric might be to look at a distribution of spreads:
A wide term structure spread frequency with notable characteristics
The gap between 1 year and 1 month implied volatility can go highly negative, but on the positive end of the spectrum it seems strongly capped. We can see that about 85% of observations occur between -3% and +5% while only 5% of daily observations ever came in at a reading of greater than a 5% gap. This implies that our current spread of 5.5% provides an opportunity.
How to take advantage of this opportunity? Sell a 1 year option straddle, buy a 1 month option straddle vega neutral and delta hedge the position. A simpler method would be to go long VXX and sell VXZ or similar in VIX futures.
Posted in Derivatives, Markets, Trading Ideas.
– September 13, 2010
