Commodities – Page 89 – Slope of Hope with Tim Knight

Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Hedging Update — ETFs

By Dpinsen - 14 years ago (16, Jun 2011 4:32:16 PM)

With weak economic data and renewed risks from the Euro zone, the Chicago Board Options Exchange Market Volatility Index (VIX) ticked up again Thursday to 22.73, its highest level since March. The table below shows the costs, as of Thursday's close, of hedging 18 of the 20 most actively-traded ETFs against greater-than-20% declines over the next several months, using the optimal puts for that. First, a reminder about why I've used 20% as a decline threshold, what optimal puts mean in this context, and a quick note about why there were no optimal puts for 2 of these ETFs.

Optimal Puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. As University of Maine finance professor Dr. Robert Strong, CFA has noted, picking the most economical puts can be a complicated task. With Portfolio Armor (available on the web, and as an Apple iOS app), you just enter the symbol of the stock or ETF you're looking to hedge, the number of shares you own, and the maximum decline you're willing to risk (your threshold). Then the app uses an algorithm developed by a finance academic to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

Decline Thresholds

You can enter any percentage you like for a threshold when using Portfolio Armor (the higher the percentage though, the greater the chance you will find optimal puts for your position). The idea for a 20% threshold comes, as I've mentioned before, from a comment fund manager John Hussman made in a market commentary in October 2008:

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even … a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

Essentially, 20% is a large enough threshold that it reduces the cost of hedging but not so large that it precludes a recovery. When hedging, cost is always a concern, which is where optimal puts come in.

How Costs Are Calculated

To be conservative, Portfolio Armor calculated the costs below based on the ask prices of the optimal put options. In practice, though, an investor may be able to buy some of these put options for less (i.e., at a price between the bid and the ask).

Why There Were No Optimal Puts for VXX and FAZ

In some cases, the cost of protection may be greater than the loss you are looking to hedge against. That was the case with iPath S&P 500 VIX Short-Term (VXX) and the Direxion Daily Financial Bear 3X (FAZ). As of Thursday's close, the cost of protecting against greater-than-20% declines in those stocks over the next several months was itself greater than 20%. Because of that, Portfolio Armor indicated that no optimal contracts were found for them.

Hedging costs as of Thursday

The data in the table below is as of Thursday's close. The ETFs are listed in order of 125-day exponential moving average volume, with the most actively-traded name (SPY) at the top.

Symbol	Name	Cost of Protection (as % of position value)
SPY	SPDR S&P 500	1.64%*
XLF	Financial Select Sector SPDR	3.44%*
EEM	iShares MSCI Emerging Markets	2.82%*
IWM	iShares Russell 2000 Index	2.82%*
QQQ	PowerShares QQQ	2.13%*
SLV	iShares Silver Trust	7.71%**
EWJ	iShares MSCI Japan Index	3.21%*
SDS	ProShares UltraShort S&P 500	3.87%*
FAS	Direxion Daily Financial Bull 3X	No optimal puts at this threshold
XLE	Select Sector SPDR — Energy	2.72%*
VXX	iPath S&P 500 VIX Short-Term	No optimal puts at this threshold
VWO	Vanguard Emerging Markets	3.87%*
EFA	iShares MSCI EAFE Index	3.72%*
XLI	Industrial Select Sector SPDR	2.57%*
FXI	iShares FTSE China 25 Index	2.99%**
GLD	SPDR Gold Shares	0.40%*
USO	United States Oil	4.57%**
EWZ	iShares MSCI Brazil Index	3.61%*
XLB	Materials Select Sector SPDR	3.12%*
SSO	ProShares Ultra S&P 500	7.89%*

*Based on optimal puts expiring in December, 2011.

**Based on optimal puts expiring in January, 2012.

Chart on Crude Oil (by Mike Paulenoff)

By TheTechTrader - 14 years ago (02, Jun 2011 11:28:08 AM)

My technicals keep warning me that crude oil hit a significant peak at $114.83 on May 2 and since then has embarked on a major correction that is only partially complete. In fact, all of the sideways, recovery action off of its May 6 corrective low at $94.63 represents a bearish rest-digestion period that should resolve itself to the downside in a plunge that projects to 90.00-86.00, and then to 80.00-78.00 thereafter. Only an upside reversal and climb above $104.00-$106.00 will neutralize my negative outlook.

Originally published on MPTrader.com.

Hedging Update (by Dave Pinsen)

By Dpinsen - 14 years ago (02, Jun 2011 5:23:30 AM)

The VIX spiked 18.45% Wednesday, raising hedging costs in many cases. In the table below, I've updated the costs (as of Wednesday's close) of hedging three major index-tracking ETFs against greater-than-20% declines over the several months, using the optimal puts, along with the costs of similarly hedging a handful of their most widely-traded components, and several other ETFs.

Two new ETF additions this week

This week, I added the Financial Select Sector SPDR (XLF), and iShares MSCI Emerging Markets (EEM). First, a reminder about why I've used 20% as a decline threshold, and what "optimal puts" means in this context.

Decline thresholds

As I've mentioned before the threshold I usually use when I hedge is 20% (i.e., I want protection against any decline worse than that). The idea for a 20% threshold came from a comment fund manager (and Stanford finance Ph.D.) John Hussman made in October 2008:

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even… a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

Optimal puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. With Portfolio Armor (available as a web app, and an iOS app) you just enter the symbol of the stock or ETF you’re looking to hedge, the number of shares you own, and the maximum decline you’re willing to risk, (your threshold). Then the app uses an algorithm developed by a finance Ph.D. candidate to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

A note about costs

To be conservative, Portfolio Armor calculates hedging costs using the ask price of the optimal puts. In many cases, you may be able to buy the puts for a lower cost (between the bid and the ask prices).

Costs (as of Wednesday's close) of hedging against >20% declines

Symbol	Name	Cost of Protection (as % of Position value)

	Widely-Traded Stocks
INTC	Intel	3.37%***
CSCO	Cisco Systems	3.30%***
MSFT	Microsoft	3.07%***
LVLT	Level 3 Communications, Inc.	11.4%**
BAC	Bank of America	5.25%***
F	Ford	3.30%**
GE	GE	2.51%**
PFE	Pfizer	2.42%**
SIRI	Sirius XM Radio	No optimal puts: cost exceeds threshold
S	Sprint Nextel	14.9%***
	Major Index ETFs
QQQ	PowerShares QQQ Trust	1.48%**
SPY	SPDR S&P 500	1.29%**
DIA	SPDR Dow Jones Industrial Average	1.13%**
	Precious Metals ETFs
GLD	SPDR Gold Trust	0.49%**
SLV	iShares Silver Trust	8.35%***
SGOL	ETFS Physical Swiss Gold Shares	2.49%**
SIVR	ETFS Physical Silver Shares	7.27%**
	Internet ETF
HHH	Merrill Lynch Internet HOLDRs	2.56%*
	Other Sector ETFs
XLF	Financial Select Sector SPDR	2.53%**
EEM	iShares MSCI Emerging Markets	2.86%**

*Based on optimal puts expiring in November, 2011

**Based on optimal puts expiring in December, 2011

***Based on optimal puts expiring in January, 2012

Thank you

The Portfolio Armor iOS app cracked into the top-20 finance iOS apps this week:

Thanks to those of you woul downloaded it.

Commodities Setting Up for Fall

By Tim Knight - 14 years ago (26, May 2011 10:53:35 AM)

Hedging Update (by Dave Pinsen)

By Dpinsen - 14 years ago (23, May 2011 10:36:14 PM)

In the table below, I've updated the costs (as of Monday's close) of hedging three major index-tracking ETFs against greater-than-20% declines over the several months, using the optimal puts, along with the costs of similarly hedging a handful of their most widely-traded components, and several precious metals ETFs.

Two new ETF additions this week

In the wake of LinkedIn's IPO last week, I also added two Internet ETFs (I suspect when those two ETFs update their top holdings, LinkedIn will be one of them). First, a reminder about why I've used 20% as a decline threshold, and what "optimal puts" means in this context.

Decline thresholds

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even… a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

Optimal puts

Costs (as of Monday's close) of hedging against >20% declines

Symbol	Name	Cost of Protection (as % of Position value)

	Widely-Traded Stocks
INTC	Intel	1.84%*
CSCO	Cisco Systems	2.02%*
MSFT	Microsoft	1.49%*
LVLT	Level 3 Communications, Inc.	17.5%***
BAC	Bank of America	3.50%**
F	Ford	4.53%***
GE	GE	3.82%***
PFE	Pfizer	2.19%***
SIRI	Sirius XM Radio	10.0%***
S	Sprint Nextel	7.00%**
	Major Index ETFs
QQQ	PowerShares QQQ Trust	1.95%***
SPY	SPDR S&P 500	1.63%***
DIA	SPDR Dow Jones Industrial Average	1.39%***
	Precious Metals ETFs
GLD	SPDR Gold Trust	0.66%***
SLV	iShares Silver Trust	4.52%*
DBP	PowerShares DB Precious Metals	1.71%*
SGOL	ETFS Physical Swiss Gold Shares	3.25%***
SIVR	ETFS Physical Silver Shares	7.59%***
	Internet ETFs
FDN	First Trust Dow Jones internet	10.0%*
HHH	Merrill Lynch Internet HOLDRs	2.91%**

*Based on optimal puts expiring in October, 2011

**Based on optimal puts expiring in November, 2011

***Based on optimal puts expiring in December, 2011

Twitter

I've noticed other posters here mention that they are on Twitter. In the event anyone's interested in my occasional tweets, here's my Twitter ID (or handle, or whatever it's called): @dpinsen