Slope Of Hope with Tim Knight

Big Cap Tech versus Internet Bubble 2.0 (by Dave Pinsen)

Big Cap Tech Versus Internet Bubble 2.0

Hey fellow Slopers,

Mike Paulenoff's post Wednesday afternoon ("Big-Cap Tech Stocks to Watch") and the release of Groupon's earnings later in the day, prompted me to take another look the hedging costs of some big cap tech stocks along with the cost hedging Groupon and a few other Internet companies that went public in 2011.

Groupon dropped 15.6% after hours Wednesday after it announced a Q4 loss, but at least one observer was bullish on it on Twitter. You might recognize his name from the late '90s:

 

Groupon now generating operating profit and strong free cash flow read.bi/ypRGEU Meanwhile, idiots still saying "Can't make money"

— Henry Blodget (@hblodget) February 8, 2012

 

Hedging a High Yield Long Idea

Hedging a High Yield Long Idea

Hey Fellow Slopers,

In a post Wednesday morning ("High-Yield Long Idea Idea Continues Strong"), Tim noted the strong performance of his long position in the SPDR Barclays High Yield Bond ETF JNK. Back in August, I looked at the cost of hedging JNK, but I thought it might be worth taking another look after seeing Tim's post. It turns out JNK is pretty inexpensive to hedge right now. The table below shows the cost, as of Wednesday's close, of hedging it against a greater-than-20% drop over the next several months.

A Comparison

For comparison purposes, I've added six of the most actively traded ETFs to the table. First, a reminder about what optimal puts are, and a note about decline thresholds; then, a screen capture showing the optimal puts to hedge JNK.

On the Eve of Options Expiration…..

I am always amazed how large the opportunity to “make it big” factors into the great magnetism of the market. The belief that anyone, from any background can be successful and make tons of money has quite the allure. But, in all of this euphoria people neglect to think about all of those that failed before them. And believe me the failure rate is high. Yet, investors/traders continue to choose the most difficult of investments to trade – stocks. Stock-only traders are at a complete disadvantage because they have no way to trade the randomness of the market. They have a 50/50 chance of success for each and every trade.

Bottom line – stock investors/traders are truly at a disadvantage.

Again, stock investors only have two ways to make a profit: buy a stock or short a stock. And most retail investors are not willing to short a stock, so basically they are only able to profit in one direction – up.

Opex Seasonality (by Trade Flight Plan)

Happy New Year! It may not be Open Season, but we are approaching January Opex Season. We bring you another episode in our fun game of Math-You-Won't-Find-Anywhere-Else, only this time it's Opex Seasonality. We compiled data from our Personal Trading Almanac to build a profile of how the major indexes perform on average each options expiration week. The data goes back 22 years and sniffs out the opex week price action from more than 5,500 data points. What's interesting is that January Opex has one of the few bearish opex week tendencies of the year. Over the past 22 years, the S&P 500s closed opex week in negative territory 63% of the time. Of course, this year can very well be different. Employment is stabilizing, the markets are shrugging off Euro debt zones, and it's an election year. But for those about to short, stay thirsty my friends...

Following Up: Optimal Hedging Costs -- a Tell For Stocks?

Happy New Year, Fellow Slopers,

I hope 2012 is a good one for each of you, and for our host.

Lessons from last year

In his post Monday ("A Major Lesson from Last Year"), Tim wrote about two of the most famous hedge fund managers who are long BAC and SHLD, respectively. There's a third money manager (this one a mutual fund guy, rather than a hedgie), whose shareholders had the misfortune of him being long both BAC and SHLD last year: Bruce Berkowitz, Morningstar's "domestic stock fund manager of the decade" for the first decade of this new century:

Meet the domestic stock fund manager of the decade

Hedging Two Banks Heavily Exposed To Europe

"Days to save the Eurozone", then the big rally

Hey fellow Slopers,

A couple of days before Wednesday's coordinated central bank action goosed global markets, Wolfgang Münchau wrote in his FT column ("The Eurozone has only days to avoid collapse") that if the European summit on December 9th didn't lead to an ambitious three part plan to save the Euro (an ECB backstop + a timetable for a Eurobond + plus an agreement on a fiscal union) the Eurozone risked collapse:

Hedging Update -- New Tech Stocks (by Dave Pinsen)

Hey fellow Slopers,

Below is a quick look at the current hedging costs for a few tech companies that went public this year. Before that, though, a quick note about a non-public company Tim blogged about Tuesday, Color ("Update on Color Silliness"). Checking AppShopper's top 200 grossing list for social networking apps, still no Color as of Tuesday night. On to the hedging costs of recent tech IPOs.

Hedging Update -- Commodity ETFs

Commodity ETF Update

Hey fellow Slopers,

A number that stood out when compiling the data for this post was the current cost of hedging the first gold ETF, GLD. Back in August, the cost of hedging it against a greater-than-20% drop over approximately the next 7 months was less than 0.95%; as of Monday, it was nearly 2.5%. The table below shows that, as well as the costs, as of Monday's close, of hedging several other commodity ETFs against greater-than-20% declines over the next several months, using optimal puts.

Comparisons

For the individual oil ETFs, I added the PowersShares DB Energy ETF (DBE) as a comparison, and for the individual agricultural commodity ETFs I added PowerShares DB Agriculture (DBA) as a comparison. First, a reminder about what optimal puts are, and why I've used 20% as a decline threshold; then, a screen capture showing the current optimal puts to hedge the comparison agricultural commodity ETF, DBA. 

Internet Hedging Update

Internet hedging update

A couple of things stood out when updating the hedging costs for this basket of Internet stocks. Again, it was still too expensive to hedge LinkedIn (LNKD) and Pandora Media, Inc. (P) against greater-than-25% drops over the next several months. Among the stocks for which there were optimal put option contracts available, Netflix (NFLX) was the most expensive to hedge -- no surprise, given the awful numbers it released this week; the surprise to me was that there any optimal contracts for it. The table below shows that, as well as the costs, as of Wednesday's close, of hedging several other leading Internet stocks against greater-than-25% declines over the next several months, using optimal puts.

Hedging Update -- ETFs

Hedging costs of Leading ETFs -- in late June and now

Hey fellow Slopers,

In looking back at the hedging costs of the most widely-traded ETFs toward the end of June versus the same basket of ETFs on Tuesday, I figured they'd all be more expensive to hedge now. That turned out to be true of 9 out of 10 of them: the only one of those ETFs that is cheaper to hedge now is the iShares MSCI Japan Index (EWJ).

The two tables below show the costs of hedging EWJ and the other 9 ETFs against greater-than-20% declines over the next several months, using optimal puts, as of June 23rd (when the VIX S&P 500 volatility index was at 19.29), and as of October 18th (with the VIX at 31.56). First, a reminder about what optimal puts are, and why I've used 20% as a decline threshold; then, a screen capture showing the current optimal puts to hedge the one ETF with lower hedging costs now than in late June (EWJ).