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)
In his Congressional testimony Federal Reserve Chairman Ben Bernanke suggested had the uptick rule been in effect it might have had some benefit in preventing the current financial crisis.
As you might know, the uptick rule, which only allowed short sales when the last sale price was higher than the previous price, was repealed by the SEC in 2007 because the agency found that changes in trading strategies rendered it ineffective.
According to Investopedia, “By entering a short sale order with a price above the current bid, a short seller ensures that his or her order is filled on an uptick.”
And over the week-end the New York Times reported that new SEC Chief Mary Schaprio is considering reviving the uptick rule.The Fast Money traders have mixed thoughts on the move, but overall they don’t think it will do much. Following are their comments.
“I think the uptick rule is just another way to legislate shiny happy people,” bristles Jeff Macke.
“Considering we trade on decimals now I think the uptick rule is a waste of time,” adds Karen Finerman.
“Oh come on,” counters Zach Karabell. “You have to have some regulatory framework or you'd have everyone in a mosh pit of trading and there would be no order to any of it.”"If you make the margins a nickle or a dime wide, the uptick rules makes sense," adds Dylan Ratigan. "Without that it makes no sense."
Year to Date
|U.S. Dollar||PowerShares DB US Dollar Index Bullish (NYSE:UUP)||
|U.S. Equity||SPDRS S&P 500 Index (NYSE:SPY)||
|Technology||PowerShares QQQ (Nasdaq:QQQQ)||
|Europe, Australia-Asia||iShares MSCI EAFE Index (NYSE:EFA)||
|Energy||United States Oil (NYSE:USO)||
|Precious Metals||iShares Comex Gold Trust (NYSE:IAU)||
|Fixed Income||iShares Barclays 7-10 Year Treasury (NYSE:IEF)||
|Frontier Markets||Market Vectors Africa ETF (NYSE:AFK)||
|As of market close, April 6, 2009.|
- There are 737 ETFs that are offered to investors and range from everything as going short on gold to taking long positions on Malaysia
- Over the past three years, ETF assets have skyrocketed 77%, while non ETF mutual fund assets climbed a mere 9%
- ETFs account for 40% of all index fund market share, and this number is expected to increase in the near future
- Most mutual fund providers are offering a vast array of ETF products. Vanguard offers 39 different ETFs and holds $45 billion in ETF assets and Fidelity just recently broke into the ETF world
- 2008 was the year the actively managed ETF was launched, building an empire of 13 actively managed ETFs and $240 million in assets
- With all due respect -- and remember, I said with all due respect -- Mike Mayo didn’t have a whole heck of a lot to do with today’s sell-off in . We’ve had a one-month equity feeding frenzy which started in banks and topped with a 350-point gap into Obama Mania last week. This was a pullback waiting for an excuse. If you’ve been playing the banks of fundamentals for the last year, with endlessly changing rules and still opaque balance sheets, you’ve been walking blind without a cane, sport.
- So, having come into today with what felt like “way too much cash” as a percentage of my portfolio, today I’ve purchased: Apple (AAPL), Wells Fargo (WFC) and as an homage to the hair-bands of my youth, my favorite exotic dancer of an equity, the SDS 2x S&P500 Inverse ETF (SDS). Lower, higher and lower, for those who like to keep track of wins and loses at home.
- So, Sun (JAVA) thought it had negotiating power with IBM (IBM), eh? Sun was trading $250 in 2000, back when it was SUNW. One wonders if JAVA board members with Take Two (TTWO), which has never been heard from again since turning down Electronic Arts (ERTS) mid-20s bid.
- The Apple buy was a rebuilding move in the position. As mentioned many times previously, my prevailing strategy has been “selling rips and buying dips.” This is day one of the first dip we’ve had in a month.
- Goldman Sachs (GS), another sold-down-to-the-bone long, is pummeling me today and nearing an uptrend line. As is the case with the whole market, where 25% gains in one month don’t really offer much in the way of “support,” Goldman moving 50% since March 9 doesn’t give a lot of footholds as we go lower. If and when the Company that Rules the Earth gets to $110, I’ll start rebuilding in earnest with a stop very near below that level (105-99). Tight stops and discipline; it’s my personal survival plan, and I’ve changed it not a bit in months.
- Speaking of which, I was ruing having any Mosaic (MOS) on my books at all this morning. Frankly, it’s not trading too poorly and, at the size I’m playing it (recall we took a short-lived ag addition off the table by selling Potash (POT) entirely last week), I’d rather add to the name at $42 - $40.
- Until midnight, I’m considering myself to be in my mid-30s. When full-bore middle age crazy hits in 11-odd hours, I’ll slightly modify my stance and buy a flesh-colored Maybach with light green racing stripes. And a motorcycle. I’ll also start wearing a toupee and taking more HgH than Sly Stallone. Beyond that, hey, age is just a number.
LONDON, April 6 (Reuters) - ETF Securities is launching a consortium of ETF issuers to boost liquidity and transparency in the market and help reduce risks, it said on Monday. ETF Securities said more than 15 global banks and financial institutions worldwide had shown "a strong desire" in joining the consortium. Previously all ETF issuers have been owned and run by single institutions. "Under the current ETF issuance model, if the sponsoring/issuing financial institution fails, it is highly likely that their respective ETFs would be greatly disrupted and potentially liquidated," ETF Securities said in a press release. "The current ETF issuance model by single financial institutions could be strengthened by diversifying index replication across a consortium of the strongest financial players and concentrating liquidity within a single platform." ETF Securities said members of the exchange would be able to participate in trading, market making, index replication, management fees and the equity value of the consortium and will be able to issue selected white label products. "From an investor's point of view we believe that there is a danger that every bank has an ETF Issuance business," said Hector McNeil, Managing Partner, at ETF Securities. "Currently there are over 10 different Eurostoxx50 ETFs. We don't need another 10. ETF Exchange will negate the need for banks to adopt this strategy." He said the consortium should be complete within the next few months. (Reporting by Rebekah Curtis; editing by James Jukwey)