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How do you get invested in market volatility $VIX

August 18, 2009 by Kyith Leave a Comment

There this site Vix and more which i came across as being a good guide to options and all things volatility of the market.

This week there is an article on how one can take advantage of volatility as a hedging function or as an opportunistic bet:

Fortunately, there are a number of VIX derivatives that allow traders to take positions on the VIX without owning the underlying. In no particular order, they are:

  1. VIX options – these include standard options as well as VIX binary options

  2. VIX futures – standard VIX futures contracts have a contract size of 1000 times the VIX; the recently added mini-VIX futures have a contract size of 100 times the VIX
  3. VIX ETNs – currently consists of two exchange traded notes: the iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ). The former targets one month VIX futures and the latter targets five month VIX futures.

In addition to VIX products, one can always trade options on the SPX (or SPY). A long VIX position is very similar to a long SPX straddle (or strangle); a short VIX position is very similar to a short SPX straddle (or strangle.)

[Read the full article at Vix and More >>]

Filed Under: Options Investment Strategies

Double Top VIX

December 8, 2008 by Kyith Leave a Comment

Recently, markets have been trending aimlessly, flirting between support and resistance. Granted this is the best market for Iron Condor trades, but the volatility could easily burst any legs within a week. I have not look at any condor trades but might start looking. I met up with an old pal of mine and he have been doing well writing covered calls on Citigroup.

Citigroup seems to be a good option for him since its cheap at USD 5 and writing 600 call contracts requires him to have 3k USD.

What does a double top in the VIX signify? I will say it could go either way. A triple top in VIX seems rare, but the MACD reading seem to show that upside to this is possible short term wise. A move lower could prove to be a catalyst for a sideways market or the freaking bottom everyone is trying to call here.

Filed Under: Options Investment Strategies, Technical Analysis Tagged With: contracts, resistance, VIX, volatility, writing covered calls

Covered Bond: Solution to the crisis?

July 9, 2008 by Kyith Leave a Comment

We heard about covered calls, but covered bonds? Portfolio.com have an article explaining briefly how this works:

Banks have assets and liabilities. If the bank borrows money from individuals, the liabilities are called “deposits”. Alternatively, the bank can borrow money from other banks, in the interbank market, or from the Federal Reserve. All of those borrowings are unsecured, and more creditworthy banks pay lower interest rates than less creditworthy banks in the interbank market. Banks can also issue bonds, if they want, which are also unsecured, and which can have much longer tenors – sometimes they’re even perpetual.

Recently, the market has been having a lot of concerns about the creditworthiness of banks in general. Interbank borrowing costs have gone up, while the prices of banks’ bonds have gone down. In such a situation, one way of bringing down borrowing costs is to borrow against collateral – secure the debt, rather than issuing unsecured debt.

Now historically, banks haven’t done this. If they have a pool of assets they want to secure, they’ll securitize it – basically, sell the assets outright to an off-balance-sheet special purpose entity for which they have no legal responsibility. In return for the assets they get cash on the barrelhead – they’re not borrowing money they’ll have to pay back in future.

But the securitization market, too, is broken right now. Investors have very little trust in the banks’ assets, which are things like mortgage loans. If the banks try to sell the loans outright, they won’t get much money for them.

Enter covered bonds.

With a covered bond, the bank doesn’t sell its assets (in this case, its mortgages); rather, it continues to own them, and it borrows money against them. If the bank ends up going bust, the lender can take possession of the underlying assets – the mortgages. But until then, the lender doesn’t own the mortgages, it just has a debt obligation of a bank.

There are two good things about covered bonds. The first is that because they’re secured rather than unsecured, they’re less risky than plain vanilla bank debt, which means that they constitute low-cost funding for the bank in question. And the second is that because the mortgages remain on the bank’s balance sheet rather than being securitized and sold off into the market, no one’s trying to sell mortgages in an environment in which the very concept is borderline toxic.

Now it’s true that covered bonds are, technically, mortgage-backed. But all the mortgages could default and go into foreclosure tomorrow, and so long as the bank remains in operation, the covered bond will pay out as normal. Similarly, if the bank blows up for some non-mortgage-related reason, investors in the bond will still get paid back in full. Their main risk is that the bank blows up because the mortgages blow up, and they’ll be left holding a bag of damaged loans – but because two things have to happen rather than just one, that risk is relatively low.

Could covered bonds be part of the solution to the current credit crisis? Paulson thinks so, and so do I. They’re not a panacea, by any means. But they certainly can’t do any harm, and they might be able to do some good.

Filed Under: Options Investment Strategies Tagged With: covered bonds

Understanding Options – Profit (loss) vs Price Graphs

November 12, 2007 by Kyith 2 Comments

Option overview

An option is a right to buy or sell an asset for a specified price and time.Let’s say you want to by a TV on sale at Wal-Mart. You drive there only to find out that it’s "sold out". So you go to the clerk and ask for a "rain check".

This "rain check" is a guarantee that you will get the TV for the sale price when they are back in stock. There may be an expiration date on the "rain check" for 1 month from the out of stock date.This rain check qualifies as an Call option.

You have the right to purchase the TV for the sale price up to 1 month regardless of how much the TV goes up or down in price during that period. You are the buying this call option and Wal Mart is the seller. The only difference of this rain check versus a real option is that there is NO value on this option and it is probably non-transferable.

Now, let’s use this same concept for a stock.

For instance, you want to buy Microsoft stock and it is trading at $50 a share. Instead of buying the stock, you decide to purchase a "right to buy the stock at 50" which will expire on 1/15/01. You would be willing to pay $3 for this right to buy Microsoft before 1/15/01 at $50.

On the other side of this deal, there is someone who is willing to sell you this right for you to buy Microsoft from him for 50. He wants $3 for granting you this contract.

Comparison table: Stock option VS Rain check for TV

 
 

Option components:

 
Stock
 
 

Rain check for TV

Expiration Date
 
1/15/2000
 
 

1/15/2000

Strike (exercise) price
 
50
 
500
Call (buy) or Put (sell)
 
call
 
call
Option price
 
3
 
NO VALUE (non transferrable)

[Read more…]

Filed Under: Options Investment Strategies Tagged With: butterfly, call, condor, covered call, decay, iron condor, neutral strategies, Options, Price Graphs, put, ratio spread, Short Straddle, straddle

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