Editor’s Note: Mr. Vialoux is scheduled to appear on Michael Campbell’s Money Talks radio show tomorrow at 12:00 Noon EST (9:00 AM PST). Hear the interview on the internet at www.cknw.com
Pre-opening Comments for Friday February 8th
U.S. equity index futures are mixed this morning. S&P 500 futures are unchanged in pre-opening trade. Trading activity is expected to be lower than usual today due to winter storm Nemo hitting Eastern Canada and the North East U.S. states.
Index futures were virtually unchanged following release of the December trade deficit report. Consensus was $45.4 billion versus $48.6 billion in November. Actual was $38.5 billion.
Canada’s December merchandise trade balance was slightly better than expected. Consensus was a deficit of $1.5 billion versus a deficit of $2.0 billion in November. Actual was a deficit of $900 million.
Canadian January housing starts missed the mark. Consensus was 195,000 units versus 198,000 in December. Actual was 160,577.
Canada’s January employment report was mixed. Consensus for January employment was a gain of 5,000 versus 31,200 in December. Actual was a decline of 21,900. The January unemployment rate slipped from 7.1% to 7.0%. However, participation rate also declined.
Manulife Financial (MFC $14.64) is expected to open higher after CIBC upgraded the stock from Sector Perform to Sector Outperform.
Deere and Cummins are expected to open lower after ISI Group downgraded the stock from Strong Buy to Buy.
Teck Resources (TCK.B $34.45) is expected to open lower after JP Morgan downgraded the stock from Overweight to Neutral.
Linkedin gained $13.01 to $137.10 after CLSA upgraded the stock from Outperform to Buy. The company also announced higher than consensus fourth quarter earnings.
CNBC headline reads, “Why gasoline prices are headed even higher”. Following is a link to the report:
Europe’s equity markets continue to weaken. ‘Tis the season!Italy has been particularly weak.
Now, here is a surprise! The most actively traded Chinese ETF is under technical pressure despite encouraging economic reports during the past couple of months.
Updates on Sector Seasonal Trades
Seasonal trades optimally have a technical score of3 based on (1) uptrend. (2) trading above its 20 day moving average and (3) outperforming the market (S&P 500 for U.S. holdings, TSX for Canadian holdings). Scores moving lower than 3 are warning signs. A score of 0=0.5 is a sell signal.
Technical score for the forest product ETF changed from 2 to 1 when WOOD moved below its 20 day moving average. Seasonal influences end in mid-February, but can extend to April.
Technical score on the Industrial SPDR changed from 3 to 2.5 when strength relative to the S&P 500 changed from positive to neutral. Seasonal influences are positive until early May.
Technical score on the Consumer Discretionary SPDR slipped from 3.0 to 2.5 when strength relative to the S&P 500 changed from positive to neutral. Seasonal influences are positive until mid-April
Technical score for the Retail ETF remains at 3.0. Units touched an all-time high yesterday. Seasonal influences are positive until mid-April.
Technical score for the Semiconductor ETF remains at 3.0. Seasonal influences are positive until the first week in March.
Technical score for the Materials SPDR remains at 1.0. Seasonal influences turn more positive near the end of February.
Technical score for the Home Builders ETF fell from 3 to 1 when units fell below their 20 day moving average and strength relative to the S&P 500 Index turned negative. The period of seasonal strength just ended. Take profits.
Technical score for Copper slipped from 3.0 to 2.5 after strength relative to the S&P 500 Index changed from positive to neutral. Seasonal influences are positive until May.
Technical score for Silver fell from 2.5 to 1.5 when units fell below their 20 day moving average yesterday. Seasonal influences are positive until the end of March.
Technical score for Platinum is at 3.0. Seasonal influences are positive until the end of May.
Technical score for Palladium is at 3.0. Seasonal influences are positive until the end of May.
Technical score for TSX Energy iShares dropped from 3.0 to 1.5 when units fell below their 20 day moving average yesterday and strength relative to the TSX Composite changed from positive to neutral. Seasonal influences are positive until early May.
Technical score for the S&P Oil & Gas Exploration and Production ETF remains at 3.0. Seasonal influences are positive until the end of April.
Technical score for the Philadelphia Oil Services Index remains at 3.0. Seasonal influences are positive until the end of April.
Technical score for the Energy SPDR remains at 3.0. Seasonal influences are positive until the end of April.
Technical score for the Gasoline ETN is 3.0. Seasonal influences are positive until the end of April.
Thackray’s 2013 Investment Guide
Thackray’s 2013 Investor’s Guide is here. Order through www.alphamountain.com , Amazon, Chapters or Books on Business.
Special Free Services available through www.equityclock.com
Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.
To login, simply go to http://www.equityclock.com/charts/
Following is an example:
Eight Year Seasonality Chart on iShare Europe 350 Index
Eric Wheatley’s Listed Options Column
Good morning everyone,
Last week, we had a look at straddles and strangles and how they can be used to take on a directionless exposure to volatility in the market. As promised, this week we’ll look at how neutral strategies such as this one are relevant to understanding how one hedges options positions.
Let’s say you’re an options trader who believes that ABC options are undervalued. That is, you think that the volatility implied in the options’ prices is lower than what the realised volatility will be over the course of the options’ lives. You do not, however, have an opinion on what ABC’s price will do, you just think that it will move. You therefore decide to purchase a straddle.
ABC is currently trading at $50, so you, a professional options trader, buy 10 April 50 calls at $1.00 and 10 April 50 puts at $1.00 (all prices are simplified). In all, you’re paying $2 per underlying share – $2,000 net. Now, if you were simply a retail punter, you’d think that your break-even points are at $48 and $52 (that is, if ABC’s price drops below $48, you’d make money; same thing if the price rises above $52). This is because in either direction, either the call or the put will increase in value enough for you to cover your initial outlay of cash.
Here’s where it gets fun: the calls currently have a delta of 50% and the puts have a delta of ‑50%. Being a pro trader – like a market-maker – you always hedge your positions. Assuming that this is your sole ABC position, you’d actually not do anything at the outset, because you’re already hedged. That is, the 10 calls have an equivalent delta of long 500 shares (10 calls * 50%) and the puts have an equivalent delta of short 500 shares (10 puts * -50%), so you’re net flat.
Now, let’s assume ABC’s price drops to $49. The calls’ delta drops to 40% and the puts’ delta “rises” to -60% (yes, delta changes. It changes according to the options’ gamma, which is one step too far for today). Your net equivalent position is now short 200 shares, because the calls have an equivalent position of long 400 shares (10 calls * 40%) and the puts have an equivalent position of short 600 shares (10 puts * -60%). As a trader, you want to get back to neutral, so you’ll offset the short position by buying 200 shares.
The next day, ABC rises to $51. The calls’ delta is now 60% and the puts’ delta is now -40%. Your net equivalent position is now LONG 400 shares, because the calls have an equivalent position of long 600 shares (10 calls * 60%) and the puts have an equivalent position of short 400 shares (10 puts * -40%) AND you’re long 200 shares outright from your previous hedge. You’ve got to reset your hedge, so you’ll SELL 400 shares to reset.
Finally, the stock comes back to $50. The deltas come back to 50% and -50%, and you’re net short 200 shares, so you’ll buy those back to reset the position.
Why the gymnastics? Well, if you didn’t hedge off your position, you’d look at your straddle with grief. You paid out money to buy the options and, at the end of the day, ABC stayed at $50. If you hedge off your delta however, you’ll have profited from the moves – that is, the volatility – in ABC. To wit: you purchased 200 shares at $49, sold 400 shares at $51 and purchased 200 shares at $50. Net, you’ve made $600.
The point here is that options traders who hedge their positions have profits which are path-dependant. The non-hedger cares only whether the stock ends up outside the $48/$52 range. The trader who actively hedges doesn’t care a whit where the stock ends up, as long as it moves one whole heckuva lot between now and the options’ expiry.
If you BUY options, you are paying out money initially in the hopes of making money by intraday trading as you hedge off the position. Options SELLERS however LOSE money when the stock moves, so they are SHORT volatility (that is, they GET money in at the outset and hope that the stock doesn’t move by much thereafter).
All of this was to illustrate a few points:
a) Any options position can be rendered relatively immune to moves in the underlying stock, just like a straddle or strangle.
b) Options traders who hedge have an entirely different appreciation of volatility than other people.
c) Active hedging entails active trading. One has to make sure that one’s trading fees are relatively low if one wants to do this.
d) Shocking revelation: contrary to everything I’ve ever read about derivatives in the press and in theoretical manuals, options AREN’T a zero-sum game. One party only cares about the destination, the other only cares about the journey. It is therefore eminently possible for BOTH parties to make money on opposite positions, just as they could both lose money.
I realise that I lost most of you two paragraphs in. I do beg your indulgence here, because THIS is what options are and how they work. If you hope to use these little animals properly, you need to understand why they behave the way they do.
Éric Wheatley, MBA, CIM
Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.
Little known fact about John Charles Hood #60
John Charles Hood feeds his options only high-quality volatility, with animal protein being the first ingredient on the list and no fillers. Please spay and neuter your non-linear derivatives.
Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc
Horizons Seasonal Rotation ETF HAC February 7th 2013