Tuesday, November 30, 2010

How to Trade With Better Than 50/50 Odds

When does a 50/50 bet not have even odds? If your answer is any betting game in Las Vegas, you are right. In the casino, the odds favor the house. If you can find a bet in Las Vegas (or Atlantic City or Macau) that pays better than even odds take this advice: Don’t tell anyone, and play that game small as often as you can until you are rich.

In the option trading world, these types of trades are also few and far between. Like gambling in a casino, if you find a stock or options trade that pays better than 50/50 odds, keep it to yourself, trade small over and over until you are rich.

While these types of true arbitrage trades almost never happen, sometimes there are opportunities to put on trades that seem to have better than 50/50 odds. This is because options are multi-dimensional. When purchasing an outright call or put, the trader is making a bet that the market (or stock) is going to move in the preferred direction AND that the implied volatility (IV) will hold stable or increase. The same holds true for shorting options.

We are currently in a cycle that has the implied volatility of S&P 500 (SPX) options falling. This makes sense considering realized volatility is very low as well. Does this mean that owning options is a bad idea? Sometimes, YES! However, there are moments where it can make a ton of sense to buy options. On Nov. 24, the day before Thanksgiving, I actually bought a few puts. (more)

Euro Debt Crisis Bankruptcy Bailout Queue, Protect Savings & Deposits From Banks Going Bankrupt!

The global banking system that publicly went bankrupt during September 2008 prompting government interventions in the form of capital injections, buying of toxic assets, insurance of bad debts and even outright nationalisation's has started to bankrupt the states that bailed them out, starting with the smaller states with Iceland setting the ball rolling, and this year the bailiffs came knocking on the doors of the Eurozone club members, with first Greece, and now Ireland requiring a Euro-zone bailout (German) to prevent debt default bankruptcy, where if one falls then soon would all of the dominos tumble.

The Euro 200 billion bailout out of Greece and Ireland is in the form of a series of loans set at a 5% interest rate, against which one can measure the relative credit risks in the market as theoretically 5% should be seen as a cap with the view that market rates should be below the 5% bailout rate. However the bond markets are NOT responding positively to Ireland's bailout as they had done during May's Greece bailout, which is evidenced by the yields on 10 year euro-zone sovereign bonds rising across the board:

Greece's 10 year yield continues to trade at a high 12% despite the Euro 110 billion bailout at 5%, because Greek bond holders continue to discount a highly probable eventual debt default / restructuring as a deflating economy has sent public debt to GDP soaring to 135%. (more)

Mr. VIX’s Wild Ride What do the VIX rally and subsequent sell-off mean for traders?

No sooner did we return from our turkey-induced coma than we found our beloved VIX commencing a pretty robust pop that began Friday, and to levels north of 23 no less.

Now I realize that may not sound like much, but it’s a two-month high and a break above the recent range of 18-22 that has bounded us since early October. What’s more, this puts the VIX more than 10% above its 10-day simple moving average (SMA) and above the standard 20,2 Bollinger band. In other words, the VIX actually was a tad overbought.

But this didn’t last long. By today’s close, the VIX had given it all back and then some. So was there any signal from this action?

There are two schools of thought regarding such a move in the VIX. A contrarian would point out that an overbought VIX equals an oversold market, and would look to fade it. That is, he would make some bullish market plays (or bearish VIX plays).

A “smart money” VIX adherent would say that the options market has spoken, and it expects rough waters ahead. He would consider a VIX pop an ominous sign of a market break ahead and look at bearish plays, or at least buy protection on a bullish portfolio.

So who’s right? (more)

Chart of the Day: Comparing Federal Deficits: Bush Vs. Obama

Ireland: From rags to riches to rags

How the tiny island country managed to stage a meteoric economic rise only to fall in a similarly spectacular fashion.

It wasn't long ago that U.S. multinational corporations entering European markets would almost always make tiny Ireland their first stop.

The draw of what used to be called the "Celtic Tiger" or the "Celtic Miracle" was obvious: Relatively low taxes and regulations, combined with a fairly young, smart, and English-speaking workforce. And because the island state is a member of the European Union, this meant that selling goods and services to other European countries was relatively cheaper and easier.

But Ireland wasn't always so market friendly. And, on Sunday, as leaders dealing with the country's huge banking crisis were offered an $89.4 billion bailout from European nations to keep its economy afloat, it's worth reflecting on the country's long history of peaked ups and downs.

For most of the 20th century and even well into the late 1980s, Ireland's economy was pretty dismal, marked by high unemployment and huge government debts. It was viewed as a backwater economy, at least by European standards. The poor and hungry fled to America and other parts of the world, while much of its workforce worked jobs in agriculture. Unemployment in 1987 was at about 18%, while debt relative to GDP rose to 120%. There was even some talk of a possible default. (more)

A Quick Profit With This Trade

My systems, along with almost all of my forecast charts, are screaming "short, short, short!"

But, my fundamental analysis of the "Big Bernanke Experiment," where he is dumping $100 billion into the market every month, is screaming just as loudly, "too much risk to short!"

However, there are some global events brewing; particularly the Korean peninsula conflict, which could play a role in the upcoming week. I believe that as long as we don't get too carried away with shorting, there might be an opportunity to pick up a solid +5% on this week's Trade-of-the-Week.

Take a look at my CycleProphet chart for the Dow Jones Industrial Average, below: (more)

Cutting the Deficit: Sacrificing Workers to Save the Rich

“There’s class warfare, all right, but its my class, the rich class that’s making war and we’re winning” Warren Buffet

The most important and popular social and tax programs in the United States are threatened by a self-styled “Bipartisan National Commission on Fiscal Responsibility and Reform”. Appointed by President Obama on February 18, 2010, co-chaired by two longstanding champions of Wall Street: ex Senator Simpson (R, WY) and former Clintonite White House Chief of Staff Erskine Bowles. The Commission Report issued November 10 proposes to slash social security payments, reducing recipients to poverty, raise the retirement age to 69 ensuring that millions of workers will die before they can retire, or enter retirement in ill health; reduce or freeze cost of living increases through inflation indexes which understate by half the rises in food, gas, hospital and education. The Commission proposes deep cuts in Medicare, increased Medicaid co-pays and slashing $54 billion from graduate medical education. The Commission proposes to eliminate tax breaks including deductions for home mortgage interest payments while taxing employer provided medical insurance.

The same Commission Report proposes to reduce capital gains and income taxes for the rich by up to 24%.

President Obama and the Republican leadership praised the Commission and wants “to give them space to work on it”. (more)

Quantitative Easing Explained

WikiLeaks’ Julian Assange Wants To Spill Your Corporate Secrets

In a rare interview, Assange tells Forbes that the release of Pentagon and State Department documents are just the beginning. His next target: big business.

Early next year, Julian Assange says, a major American bank will suddenly find itself turned inside out. Tens of thousands of its internal documents will be exposed on Wikileaks.org with no polite requests for executives’ response or other forewarnings. The data dump will lay bare the finance firm’s secrets on the Web for every customer, every competitor, every regulator to examine and pass judgment on.

(For the full transcript of Forbes’ interview with Assange click here.)

When? Which bank? What documents? Cagey as always, Assange won’t say, so his claim is impossible to verify. But he has always followed through on his threats. Sitting for a rare interview in a London garden flat on a rainy November day, he compares what he is ready to unleash to the damning e-mails that poured out of the Enron trial: a comprehensive vivisection of corporate bad behavior. “You could call it the ecosystem of corruption,” he says, refusing to characterize the coming release in more detail. “But it’s also all the regular decision making that turns a blind eye to and supports unethical practices: the oversight that’s not done, the priorities of executives, how they think they’re fulfilling their own self-interest.” (more)

The 10 Best Stock Picks of the 10 Richest Hedge Funds

Ever wish you could make $4 billion a year? That wish came true in 2009 for the most successful hedge fund manager, and once again this year, those hedge fund managers who aren't getting subpoenas for insider trading -- as SAC Capital Advisors did on Nov. 24 -- have much to be thankful for.

Now, thanks to some assistance from a former hedge fund research manager, you can consider whether to follow the investing lead of the richest hedge funds. Below, we present a list of the 10 best stock picks of the 10 highest-paid hedge fund managers.

According to AR Absolute Return, the 10 highest-paid hedge fund managers of 2009 were: (more)

Stocks stage an afternoon comeback

(CNNMoney.com) -- After tumbling early Monday morning, stocks bounced back to end the session still down, but much closer to breakeven.

The Dow Jones industrial average (INDU) fell 40 points, or 0.4%, closing the session at 11,052, according to early tallies. The S&P 500 (SPX) fell 2 points, or 0.1%, and the Nasdaq (COMP) lost 9 points, or 0.4%.

Stocks had fallen nearly 1.5% earlier in the session, sending the Dow temporarily below 11,000, but they bounced back from those lows late in the afternoon.

"I think this is a trader's market. It was a little bit sleepy this morning, but now stocks are going to come back the other way," said Rich Ilczyszyn, a market strategist with futures-broker Lind Waldock.

Ilczyszyn expects stocks to be stuck in a tight range for the last few days of the month, as traders look to close out their bets, with as much profit as possible. (more)

David Morgan on the gold/silver ratio