Monday 3-17-2008

9:30 PM
The market was choppy. The world market plunged, and Bear Sterns was marketed at $2. But the US market pre-market went down 200 and at close, the Dow was up 20 pts, Naz down 35, and SP down 11 pts. The PPT at work is very clear. Intraday, DJ Wilshire 5000, Naz and SP made new low.

To me, the bottom is no there yet. Tomorrow, there will be Fed decision. Add short positions on any bounce.

Commodity ETFs and ETNs

Which of the 6 Agriculture ETFs is Best?
http://seekingalpha.com/article/64802-which-of-the-6-agriculture-etfs-is-best

Commodity ETFs (exchange-traded funds) and ETNs (exchange-traded notes) List
(click on symbol for data and articles)

Broad Based Commodity ETFs and ETNs
GreenHaven Continuous Commodity Index (GCC)
GS Connect S&P GSCI Enhanced Commodity Total Return Strategy Index ETN (GSC)
iShares GSCI Commodity-Indexed Trust ETF (GSG)
iPath Dow Jones-AIG Commodity Index Total Return ETN (DJP)
iPath S&P GSCI Total Return Index ETN (GSP)
PowerShares DB Commodity Index Tracking Fund ETF (DBC)

Agricultural Commodities ETFs
ELEMENTS Linked to the MLCX Biofuels Index ETF (FUE)
ELEMENTS Linked to the MLCX Grains Index ETF (GRU)
ELEMENTS Linked to the Rogers International Commodity Index – Agriculture ETN (RJA)
iPath Dow Jones AIG-Agriculture ETN (JJA)
iPath Dow Jones AIG-Grains ETN (JJG)
iPath Dow Jones-AIG Livestock Total Return Sub-Index ETN (COW)
PowerShares DB Agriculture Fund ETF (DBA)

Gold, Silver and Metals ETFs
iPath DJ-AIG Industrial Metals Total Return Sub-Index (JJM)
iPath DJ-AIG Nickel Total Return Sub-Index (JJN)
iShares COMEX Gold Trust ETF (IAU)
iShares Silver Trust ETF (SLV)
PowerShares DB Gold Fund ETF (DGL)
streetTRACKS Gold Shares ETF (GLD)
PowerShares DB Silver Fund ETF (DBS)
PowerShares DB Precious Metals Fund ETF (DBP)
PowerShares DB Base Metals Fund ETF (DBB)

Oil and Gas ETFs and ETNs
Claymore MACROshares Oil Up Tradeable ETF (UCR)
iPath DJ-AIG Energy Total Return Sub-Index (JJE)
iPath DJ-AIG Natural Gas Total Return Sub-Index (GAZ)
iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)
PowerShares DB Energy Fund ETF (DBE)
PowerShares DB Oil Fund ETF (DBO)
United States Gasoline Fund, LP ETF (UGA)
United States Oil Fund, LP ETF (USO)
United States 12 Month Oil Fund, LP ETF (USL)
United States Natural Gas Fund, LP ETF (UNG)

Commodities-Related ETFs
Van Eck Market Vectors Agribusiness ETF (MOO)
Van Eck Market Vectors Coal ETF (KOL)
Van Eck Market Vectors Gold Miners ETF (GDX)

What Are They?

Commodity ETFs (exchange traded funds) attempt to track the price of a single commodity, such as gold or oil, or a basket of commodities by holding the actual commodity in storage, or by purchasing futures contracts. Because futures provide leverage (more exposure than the actual cash invested), ETFs that use futures contracts have uninvested cash, which they usually park in interest-bearing government bonds. The interest on the bonds is used to cover the expenses of the ETF and to pay dividends to the holders.
Commodity ETNs (exchange traded notes) are non-interest paying debt instruments whose price fluctuates (by contractual commitment) with an underlying commodities index. Because they are debt obligations, ETNs are subject to the solvency of the issuer.
Commodities-related ETFs generally track the producers of commodities, such as mining companies. While the financial performance of those companies -- and thus their stocks -- may be highly leveraged to the underlying commodity, other factors can impact the profitability of production. The ETFs, therefore, may not reflect the performance of the underlying commodity. For example, gold miners are highly leveraged to the discovery of gold deposits, exchange rates and their relationships with the countries where gold deposits are found.
Why & How To Use Them

Commodities are a separate asset class from stocks and bonds, so they provide extra diversification in a portfolio.
The case for commodities: The industrialization of the China and India and the integration of Russia and Eastern Europe into the global economy are boosting demand for commodities, driving up prices. Many people believe that this will result in a long term uptrend ("super cycle") in commodity prices.
The case against commodities: In contrast to stocks and bonds, commodities are not income generating. So ownership of commodities, including via ETFs or ETNs, is a pure bet on prices. And the expenses charged by the ETF and ETN providers and in the cost of storing hard assets or trading futures eat away at the underlying value of the fund.
Commodity ETFs and ETNs can also be used as a hedge. For example, if you consume a large amount of gasoline and heating fuel and are concerned about the impact on your income of a rise in oil and gas prices, buying an oil and gas ETF can help offset your exposure.
What to Look Out For

Commodities ETFs that use futures have diverged significantly from the price of the hard commodities themselves. ETNs, in contrast, track the price of the commodity closely. See the articles in the Further Reading section below.
There are dramatic differences in structure of these ETFs and ETNs, even for the same commodities, leading to potential differences in performance and tax treatment.
ETFs and ETNs are treated differently for taxation purposes. Current opinion is that all gains on ETNs held for longer than one year are treated as long-term capital gains, whereas an investor owning a futures-based ETF is taxed on any capital gains on the underlying futures held by the fund using the taxation convention for futures, ie. at a hybrid rate of 60% long-term, 40% short-term each year on all gains, even if the investor doesn't sell the fund. (Check this carefully with your accountant.)
Further Reading

For long term investors considering including a commodity ETF in a diversified portfolio, the value of commodities as a diversifier is addressed by Nik Bienkowski in Commodities Outperform During Equity Market Downturns. Mebane Faber discusses a portfolio including commodities exposure in An Endowment Portfolio From Publicly-Traded Vehicles. For a negative view on the investment case for commodities, see Bill Miller on Oil, Silver, Other Commodities: Don't Buy!.
Roger Ehrenberg discusses using commodity ETFs to hedge real exposure to oil and gas in Think Carefully Before Macro Hedging Your Life/Work/Oil Exposures.
The underperformance of futures-based commodity ETFs relative to the actual commodity they are supposed to track is discussed in Scott Rothbort's US Oil Fund ETF Fails Investors Consistently. Richard Shaw presents the case for commodity ETNs over commodity ETFs in Troubled By ETF Tracking Failures? Try ETNs. See also The ETN Market Heats Up With Goldman Launch; More On the Way (Matt Hougan).
Should you use a broad commodities ETF or a set of ETFs or ETNs that track individual commodities? See Richard Kang's Is Commodity ETF Slicing and Dicing Necessary?.
For further analysis of these ETFs, and comparisons between them, see: Commodity ETF Overview (Tim Iacono), A Look at the New GreenHaven Commodity ETF (Hard Assets Investor), Commodity Exposure Via ETFs: A Fund Manager's Process (Keith Lenger), Ameristock Funds' New Gas Futures ETF: An Attractive Instrument In So Volatile a Market (Matt Hougan), First Gasoline ETF Comes to Market (Murray Coleman), Natural Gas ETF Is No Long Term Hold (Zman), New iShares GSCI Commodity Trust - Key Points To Understand (Market Participant), Commodities ETFs Protect The Little Guy (Tim Iacono), The New Generation of Diversified Commodity Indexes (Rich White), New ETF Tracks Oil-Prices Across 12 Months (Eli Hoffmann) and Digging Deeper Into Commodity-Based Funds (Keith Lenger).
For analysis and discussion of agricultural commoditiies ETFs see Powershares' Agricultural ETF: The Soft Commodities Slam Dunk (Nicolas Vardy), PowerShares DB Agriculture ETF: 'Optimum Yield' or Undue Risk? (Don Dion) and Which of the 6 Agriculture ETFs is Best? (Matthew D. McCall).

Friday 3-14-2008

12:00 AM
Some observation is very important. Yesterday, it opened lower, and went up positive. The S&P said that bank's write-down was almost done. This morning, the market went up huge with good CPI numbers. But right after the open, BSC released news that it had liquidity problem and couldn't continue with its business. It was huge bomb, and stock went down close to 300 pts.

The observation here is that yesterday, the market up with no news (some fake news issued by credited company) before the real fact news out. So we need to see the facts instead of any news.

Tuesday 3-11-2008

12:20 PM
The market went down again yesterday. SP almost touched the Jan low. NAZ has been lower than Jan low. Dow is getting close. So it is in the virgin of breaking all time lows.

This morning, Fed injected $200B into the financial system. It offered 28 days loans to the banks. The market took it as good news, and went up 250 pts at one time. Here is some of my thoughts:
1. It happened on 2000 recession. The market went up huge before the next leg down.
2. The injection of this huge amount of money is in order to make the banks still functional in events such as stock market crash, or other financial crisis.

So, I believe there will be further very bad news coming in financial mainly. The key to the event is to monitor the market reaction, and measure the depth of this reaction. Sell to any strengths shouldn't be any issue here. Mainly short the finances sector, and indices.

Monday 3-10-2008

2:25 PM
The market is on the down trend. The NAZ made new low. Now the S&P has touched 1270. I have just closed all the shorts positions at 2:28 pm.

How to Make Money in a Recession

How to Make Money in a Recession... (If You Are a Big Banker).

So you've just taken over as CEO of SuperMegaMonster Bank. Your predecessor skated off into retirement with a $200 million golden parachute, leaving you to manage $200 billion in bad loans and assorted toxic waste just as the economy is plunging into recession. What are you going to do?

Step 1: Write-Offs
Take huge one-time hits to your earnings and balance sheet and blame it all on the last guy. You'll be able to show a profit sooner if you don't have all these losses trickling in over time. When you do start claiming positive earnings again you'll get all the credit and big bonuses too.

Step 2: Offload Risk
Shift ownership of as much of your toxic waste as possible to the government and retail investors. Scare the crap out of government leaders and the Fed by telling them our entire economic system will come unraveled if they don't save the big banks. They'll enact a wide range of idiotic policies designed to bail you out of the mess your firm created and profited from in the first place. Public pension plans can be suckered into any investment so load them up with the worst of the worst.

Step 3: Credit Crunch
Call in loans to hedge funds, mortgage REITs and other investment schemes. They've served their boom cycle purpose and now they are expendable. Use the money that comes flowing back in to your coffers to purchase the securities that they are forced to unload at a steep discount. The Fed will loan you extra money at ultra cheap rates with your existing securities as collateral so that you can leverage up on even more cheap investments. Don't buy the hopeless stuff, just buy the higher quality stuff that will survive the recession or senior debt that will survive the bankruptcy process.

Step 4: Ride the Carry Trade
With short term rates low and yields high you can play the carry trade for maximum profit. Panicked investors will put their money in low yielding savings accounts and money market accounts and you can invest this in the long-term, high yielding stuff you soaked up in the credit crunch. As short term rates continue to fall, the spread widens and your profit margin increases.

Step 5: Kill Off Struggling Entities
Identify any exposure you have to companies or municipalities that are likely to become insolvent in a recession. Make sure you sell off any equities or long term debt you hold first. Then pull their short term funding to force them into bankruptcy. Layoffs and general panic will help you pick up more securities on the cheap.

Step 6: Eliminate the Competition
Take advantage of the struggling economy to wipe out any competition that grew too quickly in the last boom cycle. Sub-prime lenders? Savings and Loans? Small, local banks? REITs? Fannie Mae? Kill all you can while you can, as you don't want them to compete with you for banking business in the next boom cycle or investing opportunities late in the bust cycle.

Step 7: Debase the Currency
Lobby the Fed for low rates and the Federal Government for deficit spending. Remember that you are now a carry trader, rather than an creditor. It doesn't hurt you if debtors pay you back in a debased currency because you get to pay back depositors in a debased currency as well. To the extent that you have equities, real estate and other hard assets on your books offset by short term debt, inflation actually works in your favor. Paper gains on these assets will help your case with the compensation committee around bonus time.


Reality
No doubt, the big banks are in a very precarious situation right now, but they have their tentacles wrapped around Washington and the Federal Reserve System. There is a clear path to banking profitability and it will come almost entirely at our expense as citizens, investors and taxpayers. All of these steps overlap in the timing of their effectiveness, and I expect we'll see most of the same themes continuing to pop up over the next couple of years as the recession deepens. So far we've seen:

1. A huge "stimulus" package that will help some distressed borrowers make some more mortgage payments. (Step 2)
2. A big increase in FHA, FHLB, Fannie Mae and Freddie Mac backed loans and securities to take up some of the load off of Wall Street with regards to the mortgage mess. (Step 2)
3. The invention of "Term Auction Credit" as a way of helping big banks sustain or increase their investment portfolios. (Step 3)
4. Falling short term rates to lower the borrowing costs for big banks. (Step 4)
5. Widening spreads to increase the profitability of banks that purchase new assets. (Step 4)
6. A large credit crunch that is forcing hedge funds and other investment vehicles to sell into a difficult market, with investors taking the losses. (Step 3)
7. Continuing rapid growth of the money supply. (Step 7)
8. Struggling municipalities. (Step 5)
9. Rising inflation. (Step 7)
10. A declining dollar. (Step 7)
11. A variety of measures designed to help forestall foreclosures and let banks fudge their accounting for bad loans. (Step 2)
12. The VISA IPO. (Step 2)
13. Big banks helping Thornburg Mortgage raise $230 million in stock offerings in January, only to give them big margin calls in March. (Step 5)
14. The collapse of hundreds of smaller banks and lenders. (Step 6)
15. The abandonment of the Auction Rate Securities market. (Step 3)
16. Seizing control of hedge funds to liquidate their assets. (Step 3)

Eventually the economy will hit bottom and the banks can go back to their even more profitable boom cycle business plan, where they make money by extending credit to anyone who wants to take risks and can make the payments in an expanding economy. It might take awhile for the dust to settle this time though, because the big banks sure managed to mess the economy up badly this time.

About Options Pricing /Trading

(1) 如果想对 "Black-Scholes" options pricing model有更多了解, 不妨一试下面的LINK:

http://en.wikipedia.org/wiki/Black-Scholes

You can also find many numerical methods to price options in the finance literature.

(2) If you've no time for Black and Scholes and need a quick estimate for an at-the-money call or put option, here is a simple formula.

Price = (0.4 * Volatility * Square Root(Time Ratio)) * Base Price

Time ratio is the time in years that option has until expiration. So, for a 6 month option take the square root of 0.50 (half a year).

For example: calculate the price of an ATM option @ $45 (call and put) that has 3 months until expiration. The underlying volatility is 23%.

Answer: = 0.4 * 0.23 * SQRT(.25) *$45

Option Theoretical (approx) = $2.07

(3) What Affects Equity Option Prices?

 The current price of the underlying financial instrument
 The strike price of the option in comparison to the current market price (intrinsic value)
 The type of option (put or call)
 The amount of time remaining until expiration (time value)
 The current risk-free interest rate
 The volatility of the underlying financial instrument
 The dividend rate, if any, of the underlying financial instrument

注意不要本末倒置, 抓住重点, 才能有的放矢。

(4) 对于个人帐户, trading gamma vega theta rho....常常会十分困难, 甚至可以忽略不计, 但俺赞成在trading options前, 对这些概念最好有深入的了解。 Options are the most versatile trading instrument ever invented。 它的最大的好处是high leverage 和limited risks， 所以要善加利用这两点。如果把trading options 和trading the underlying结合起来，在运动(trading)中消灭敌人和在运动(trading)中保护自己, 这有可能是小户战胜大户的致胜之道。

Theta and Vega, example is inside

Theta is a measure of the rate of decline of option’s time-value resulting from the passage of time (time decay).
Theta provides an estimate of the dollar amount that an option price will lose each day due to the passage of time and there is no move in either the stock price or volatility.


Example:
The price of ABC May 50 Call with 25 days to expiration is $3. Its theta is -0.10. The price of ABC Jul 50 Call with 85 days to expiration is $4.8, and the theta is -0.03. When one day passes and there is no change in ABC stock price as well as the implied volatility of either options, the value of ABC May 50 Call will decrease by $0.10 to $2.9, and the value of ABC Jul 50 Call will drop by $0.03 to $4.77.


Theta of ATM, ITM & OTM Option

Theta is typically highest for ATM options, and is progressively lower as options are ITM and OTM.
This makes sense because ATM options have the highest time value component, so they have more time value to lose over time than an ITM or OTM option.


For ATM option, Theta increases as an option get closer to the expiration date.
In contrast, for ITM & OTM options, Theta decreases as an option is approaching expiration. The above effects are particularly observed in the last few weeks (about 30 days) before expiration.

The Impact of Implied Volatility (IV) and Time Remaining to Expiration on Theta

Theta (time decay) would increase sharply in the last few weeks before expiration and can severely undermine a long option holder's position, particularly if Implied Volatility (IV) is also decreasing at the same time. This is because theta is higher when either volatility is lower or there are fewer days to expiration.

Vega measures the sensitivity of an option’s price to changes in Implied Volatility (IV). Vega estimates how much an option price would change when volatility changes 1%.


Example:
The current price of ABC May 50 Call is $3, with Vega 0.20 and the volatility of ABC stock is 35%. If the volatility of ABC increases to 36%, the ABC May 50 Call’s price will rise to $3.20. If the volatility of ABC drops to 34%, the ABC May 50 Call’s value will drop to $2.80.


Vega of ATM, ITM & OTM Option
The impact of volatility changes is greater for ATM options than for the ITM & OTM options.
Vega is highest for ATM options, and is gradually lower as options are ITM and OTM.
This means that the when there is a change in volatility, the value of ATM options will change the most. This makes sense because ATM options have the highest time value component, and changes in Implied Volatility would only affect the time value portion of an option’s price.
Comparing between ITM & OTM options, the impact of volatility changes is greater for OTM options than it is for ITM options


The Impact of Time Remaining to Expiration on Vega
Assuming all other things unchanged, Vega falls when volatility drops or the option gets closer to expiration.
Vega is higher when there is more time remaining to expiration. This makes sense because options with more time remaining to expiration have larger portion of time value, and it is the time value that is affected by changes in volatility.

1900-2008 $INDU

Bear market Elliott Wave count

Friday 3-7-2008

11:30 AM
This morning the job number was very bad, and Fed did something for the bond market before the number announcement. So now, the market is flat.

That is not important. The important thing for me is that there was post on hutong9.com. ppl are talking about the inflation. Since it is a very conflicting topic, I am very confused now. But one thing is clear that the baby boomer has been created tons of wealth (paper gain - dollars). Now they want to spend it. So I think this is the reason of inflationary. I need to research for it. This is really the next coming trend.

Economic indicators

Leading indicators

An economic indicator that changes before the economy has changed. Examples of leading indicators include production workweek, building permits, unemployment insurance claims, money supply, inventory changes, and stock prices.

Lagging indicators

An economic indicator that changes after the overall economy has changed; examples include labor costs, business spending, the unemployment rate, the prime rate, outstanding bank loans, and inventory book value.

Thursday 3-6-2008

8:40 AM
Ever since Buffett talked about US in recession, the market's tone is totally confirmed. The direction of the market is much clearer than before. Long journal in the bear market. Yesterday, the market waited for the ambac bailout news which was not exciting. The bail out is small and not enough. Now the future is down a lot.

Wednesday 3-5-2008

11:00 AM
Today's market is worth to be recorded. Yesterday, the indices (NDX) broke the downtrend line. At one time, around 1:30 pm, the DOW was down -200 pts. But in the last 1.5 hours trade, the market moved up and closed flat. So yesterday was a turnaround day. But all the indicators point no bottom yet.

This morning, the market got some "good" news, that the ISM service reading was better than expected (but still in contraction mode). One of the largest bond insurer is getting help and about to settle soon. So I guess that market is waiting for this news and heading higher.

My play is to add short positions on the news. Let it play out first. The timing might be either tomorrow morning, or on Friday.

Tuesday 3/4/2008

9:15 AM
After Friday's big down and yesterday's weak pause, today's future is down again. The trend is very clear. I had sold QID, SDS, and 1/2 puts options way too early. Here I believe the building heavy construction (engineering and contructions) stocks will have a good down turn. So I will looking into KBR and PWR to short.

Monday 3/3/2008

12:30 AM
The market had a lower future, but opened flat, went down about 100 pts, now it is flat again. Overall, due to the large sell off -300 on last Friday. This action should be the continous confirmation. Seeking for some point to reload the short positions.