CNBC reporter and Trader Talk blogger Bob Pisani says Morningstar predicts that exchange-traded funds (ETFs) may soon see a rich inflow of investor money.
In his regular CNBC 101 investor segment, Pisani explained why.
"I've championed ETFs," he said, as a low-cost way to play the market, with "lots of diversification and lots of products to choose." But there's been a problem keeping the funds from reaching their full potential: they cannot penetrate 401(k)s, thanks to brokerage fees, which obstruct cost-dollar averaging.
He notes that that 401(k)s currently hold some $2.5 trillion; there is only $541 million in ETFs. (yes, that's trillions vs millions.)
But Pisani reports that Morningstar has projected that 10 percent of 401(k)s could be rolled over through the next several years, bring a torrent of cash to largely unexploited ETFs — potentially boosting ETFs by nearly 25 percent.
Welcome back to another in a series of articles that examines the thought process behind a variety of option strategies using stock and/or exchange-traded fund (ETF) options. This column will examine a potential ratio backspread, the pros and cons of putting on a ratio backspread, and the profit and loss potential of this position. So, let's jump into this interesting strategy. Ratio backspreads are relatively complex strategies employed by investors who expect a big move from the stock, are relatively sure of the direction, but still want to limit their risk. The strategy is structured to allow for sizeable profits if the investor's projections on timing and direction are correct. In fact, the trader could potentially book a small profit, if the directional prediction is incorrect, The call ratio backspread, executed if a trader is bullish on the underlying stock, index, or ETF, involves selling a number of calls at one strike and buying more calls at a higher strike price. Typically, a 1:2 or 2:3 ratio is employed, but the ratio is always 2:3 or less. The position entered is bullishly aligned because more higher-strike (out-of-the-money) calls are purchased than lower-strike (generally in-the-money) calls are sold. The cost of the long calls is modestly offset by the sold call, which helps alleviate the cost burden and helps compensate for the impact of time decay. Meanwhile, a put ratio backspread is the exact inverse. In this bearish strategy, the options trader would buy a number of puts at one strike (usually in the money) and then sell a smaller number of puts at a lower, out-of-the-money strike. In both call and put backspread situations, all of the options involved should have the same expiration date. If a ratio backspread is structured properly, proceeds from the options sold will match or exceed the price of the purchased options and create a hedge. This hedge allows a trader to book a small profit or break even if the trade moves against him. The trade-off is that the upside breakeven point is higher compared to the outright purchase of a call that is naked. Full Story: http://www.schaeffersresearch.com/commentary/content/ratio+backspread/observations.aspx?click=home&ID=92307
- Green Line: Buy and hold FAS = -86.3%
- Red Line: Buy and hold FAZ = -76.9%
- Yellow Line: Buy and hold equal amounts of FAS and FAZ with no rebalancing (what some might consider a perfect hedge) = -81.6%
- Cyan Line: Buy equal amounts of FAS and FAZ and rebalance every day (a lot of work) = -25.0% (not counting transaction fees and slippage)