When should we get greedy?

[TUK020]

Be warned - I'm about to get technical here... Is the VIX the same thing (in so far as what it is saying) the same as this "fear and greed" thing right over here:

https://money.cnn.com/data/fear-and-greed/


Matt

VIX is one of the 7 'inputs' they cite for the Fear and Greed index

https://www.marketwatch.com/investing/index/vix/charts

[GoSeigen]

Turns out 2825 was a fantasy. S&P opened at 3161 at expiration today so most of my short calls were in the money. I decided to roll them into short index futures given the high level of the S&P. That might be premature but I am elsewhere leveraged long UK and international stocks so happy to start hedging a bit. This is a directional call, the first time I've felt comfortable about it for some time. Depending what happens I may trade short straddles again. VIX is still pretty high.

Hi GS,

Be warned - I'm about to get technical here... Is the VIX the same thing (in so far as what it is saying) the same as this "fear and greed" thing right over here:

https://money.cnn.com/data/fear-and-greed/

If so, according to this above media gossip, it looks as if greed is returning to the market place, does it not?

Matt

The VIX is the last element of the CNN list, so just one of a number of indicators they look at. VIX is very specific: it is a mathematical calculation of the implied volatility of S&P500 index options.

As for whether greed is returning, perhaps, but I'd agree with the overall view which is that the picture is mixed, neither strongly bullish nor bearish.


GS

[GoSeigen]

https://wolfstreet.com/2020/06/19/i-who-hates-shorting-just-shorted-the-entire-stock-market-heres-why/

The US commentator shares my thoughts.

John

Wouldn't it be more impressive if written on 19 Jan rather than 19 Jun?

In case he didn't notice the market has already had a 30%+ drop. That cleared out a lot of people who bought too high and let in value investors who were waiting to buy low. US markets have recovered mostly, but many others are still rather bombed out.

I might be totally wrong though... and this is a short-term call, much can change in coming weeks.


GS

[johnhemming]

I think the US is probably still overvalued, but the UK undervalued (varying stock by stock).

[ADrunkenMarcus]

I think the US is probably still overvalued, but the UK undervalued (varying stock by stock).

Very true IMHO but there are people with capital. Where do they stuff it?

I suspect a lot of them have been driven into equities in the search for a decent return - and are doing so still. Valuations could well go much higher.

Or not.

When an article in the Financial Times is headlined 'Top US pension fund aims to juice returns via $80bn leverage plan' then it makes you wonder whether people should stop juicing.

Best wishes

Mark.

[johnhemming]

'Top US pension fund aims to juice returns via $80bn leverage plan' then it makes you wonder whether people should stop juicing.

This is a public sector fund where the US State (California) were it to be a private business would be told to fund the deficit of the pension fund, but as it is the public purse they are going to put it all on black.

[TheMotorcycleBoy]

Turns out 2825 was a fantasy. S&P opened at 3161 at expiration today so most of my short calls were in the money. I decided to roll them into short index futures given the high level of the S&P. That might be premature but I am elsewhere leveraged long UK and international stocks so happy to start hedging a bit. This is a directional call, the first time I've felt comfortable about it for some time. Depending what happens I may trade short straddles again. VIX is still pretty high.

Hi GS,

Be warned - I'm about to get technical here... Is the VIX the same thing (in so far as what it is saying) the same as this "fear and greed" thing right over here:

https://money.cnn.com/data/fear-and-greed/

If so, according to this above media gossip, it looks as if greed is returning to the market place, does it not?

Matt

The VIX is the last element of the CNN list, so just one of a number of indicators they look at.

Ah.. silly me, I see the other 6 ingredients now.

VIX is very specific: it is a mathematical calculation of the implied volatility of S&P500 index options.

Very approximately, it was 12 ish 6 months back, 82.7 at its peak (mid march), as low as 25 a fortnight back, but has jumped back to the mid-30s of late. Presumably coincident with "second wave" fears and reciprocated slightly (but in reverse) in the recent S&P.

As for whether greed is returning, perhaps, but I'd agree with the overall view which is that the picture is mixed, neither strongly bullish nor bearish.

I'm thinking it's basically a bull that keeps tripping up, e.g. by fears of second lockdowns if a second major infection wave. As Mark points out there's still capital and of course miniscule returns from fixed index etc.

I suppose that in the States other downward shocks may come from the quarterly earnings releases, but presumably the companies talk to analysts in between and give guidance, so I guess this is partly assimilated week by week.

Matt

[GoSeigen]

[

As for whether greed is returning, perhaps, but I'd agree with the overall view which is that the picture is mixed, neither strongly bullish nor bearish.

I'm thinking it's basically a bull that keeps tripping up, e.g. by fears of second lockdowns if a second major infection wave. As Mark points out there's still capital and of course miniscule returns from fixed index etc.

I suppose that in the States other downward shocks may come from the quarterly earnings releases, but presumably the companies talk to analysts in between and give guidance, so I guess this is partly assimilated week by week.

I don't understand what Mark meant. To me capital does not get used up as it is "stuffed into" or "driven into" stocks. This is an obscure way of viewing the world. I mean, what is this "capital" being spoken about, and what happens to it?

I much prefer to discuss the problem in terms of the market's desired asset allocation or its valuation of particular assets -- which are two different ways of saying the same thing.

I think valuations are uncertain right now. There is likely to be volatility and stocks can rise or fall according to the changing sentiment of investors. I still don't fancy trying to call the direction; my strongest feeling is that there is further sideways trading ahead so roughly flat overall but choppy.


GS

[ADrunkenMarcus]

I don't understand what Mark meant.

Much of this is a debate about equity valuations. It is this idea that people with capital are being forced into higher risk assets to generate the return they need or desire - whether that be pension funds, private investors or anyone in between.

According to National Review: 'Struggling to meet return targets, funds across the nation have upped the amount of risk in their portfolios.'

The California Public Employees’ Retirement System (CalPERS) is in trouble. For the second consecutive year, the public-pension fund has failed to hit its 7 percent return target. As it faces a funding shortfall of more than $150 billion, CalPERS’s recent bout of underperformance raises concerns about California’s solvency at a time when state and local budgets are already stretched.

CalPERS chief investment officer Ben Meng has a solution: more risk. He announced Monday that the fund would increase its allocations to alternative investments, such as private equity and private credit, while leveraging its portfolio to enhance returns. Facing the headwinds of soaring valuations, historically low interest rates, and anemic economic growth, CalPERS can no longer meet its target with safe assets.

(see: https://www.nationalreview.com/2020/06/ ... n-targets/)

Actually, they could cut their return target instead but I digress..

If interest rates are going to remain low for an extended period of time, it seems to me that people will search for a return from equities rather than bonds. If so, valuations on equities may be higher than they would otherwise have been. We naturally judge equity valuations by their historic performance but it may be that they will rise further.

Best wishes

Mark.

[TheMotorcycleBoy]

I don't understand what Mark meant.

Much of this is a debate about equity valuations. It is this idea that people with capital are being forced into higher risk assets to generate the return they need or desire - whether that be pension funds, private investors or anyone in between.

According to National Review: 'Struggling to meet return targets, funds across the nation have upped the amount of risk in their portfolios.

If interest rates are going to remain low for an extended period of time, it seems to me that people will search for a return from equities rather than bonds. If so, valuations on equities may be higher than they would otherwise have been. We naturally judge equity valuations by their historic performance but it may be that they will rise further.

Yes, mine and Mark's sentiments are basically the same in all the matters quoted above.

Matt

[EthicsGradient]

According to National Review: 'Struggling to meet return targets, funds across the nation have upped the amount of risk in their portfolios.'

The California Public Employees’ Retirement System (CalPERS) is in trouble. For the second consecutive year, the public-pension fund has failed to hit its 7 percent return target. As it faces a funding shortfall of more than $150 billion, CalPERS’s recent bout of underperformance raises concerns about California’s solvency at a time when state and local budgets are already stretched.

Perhaps, but an anecdote from the National Review about public-sector finances shouldn't be taken as containing accurate reporting. The National Review is a decades-old conservative publication with a deep loathing of the public sector. This is like taking UKIP's word for the finances of the EU. Notice that all the 'funds' it's talking about are public sector pension funds. The article's purpose is to say "there shouldn't be public sector pensions".

[ADrunkenMarcus]

This is like taking UKIP's word for the finances of the EU.

In that case, I'd discount it entirely!

I do not know if there are other instances other than the CalPERS example, from more sober sources.

Best wishes

Mark.

[GoSeigen]

This is like taking UKIP's word for the finances of the EU.

In that case, I'd discount it entirely!

Or the BoE governor's for the UK LOL!

https://www.theguardian.com/world/2020/ ... of-england
"Britain nearly went bust in March"


GS
P.S. I call a turning point for gilts BTW. Now BoE policy bearish IMO, not to mention silly valuations.

[GoSeigen]

Last week for the first time in my life I went short on the FTSE100 with a 2x short ETF. I am watching it closely but it seems to be working so far.

Hopefully you took the chance to get out in the recent 7-8% drop, load up again later.


Personally I'd begin this sort of trade with about 0.3% of my cash, if I wanted to end up with 3% exposure and leg in over about five trades, though 3% is maybe okay if you can promise yourself not to buy any more. It's a real widowmaker, this one.

Here's the maths: You buy £100 of FTSE double-short ETF when the FTSE costs 100. First day FTSE goes up 10%. It's now worth 110, but you just lost 20%, so your ETF is worth £80. Next day market dives by 9%. It's back to 100. Your ETF rises 2x9%=18%. Your ETF is worth 1.18*80 which is 94.4.

So in two days the FTSE has not changed its value but your ETF is down more than 5%. That's not good. Now obviously, the moves are not going to be so big each day but 1. after many little moves you will as surely lose money and 2. given the market is so volatile those losses will be much larger than they were back in January/February, say.


About the only thing that will save you is a near-term violent fall in which you close your position. Then you might get your money back or even a bit more. But without the golden timing this trade is bleak at the moment.



If you want a short punt, I think short futures look a much better bet. But I prefer to get paid to just wait and see in these conditions (almost taking the other side of your trade). Future direction is hard to pick, IMO, and for the FTSE in particular the path of least resistance is up: some parts of it still look really bombed out.


GS

[redsturgeon]

Last week for the first time in my life I went short on the FTSE100 with a 2x short ETF. I am watching it closely but it seems to be working so far.

Hopefully you took the chance to get out in the recent 7-8% drop, load up again later.


Personally I'd begin this sort of trade with about 0.3% of my cash, if I wanted to end up with 3% exposure and leg in over about five trades, though 3% is maybe okay if you can promise yourself not to buy any more. It's a real widowmaker, this one.

Here's the maths: You buy £100 of FTSE double-short ETF when the FTSE costs 100. First day FTSE goes up 10%. It's now worth 110, but you just lost 20%, so your ETF is worth £80. Next day market dives by 9%. It's back to 100. Your ETF rises 2x9%=18%. Your ETF is worth 1.18*80 which is 94.4.

So in two days the FTSE has not changed its value but your ETF is down more than 5%. That's not good. Now obviously, the moves are not going to be so big each day but 1. after many little moves you will as surely lose money and 2. given the market is so volatile those losses will be much larger than they were back in January/February, say.


About the only thing that will save you is a near-term violent fall in which you close your position. Then you might get your money back or even a bit more. But without the golden timing this trade is bleak at the moment.



If you want a short punt, I think short futures look a much better bet. But I prefer to get paid to just wait and see in these conditions (almost taking the other side of your trade). Future direction is hard to pick, IMO, and for the FTSE in particular the path of least resistance is up: some parts of it still look really bombed out.


GS

Thanks for this.

I am still in the money but my thinking is definitely aligned with yours.

I will not hold beyond this week.

John

[redsturgeon]

Last week for the first time in my life I went short on the FTSE100 with a 2x short ETF. I am watching it closely but it seems to be working so far.

Hopefully you took the chance to get out in the recent 7-8% drop, load up again later.


Personally I'd begin this sort of trade with about 0.3% of my cash, if I wanted to end up with 3% exposure and leg in over about five trades, though 3% is maybe okay if you can promise yourself not to buy any more. It's a real widowmaker, this one.

Here's the maths: You buy £100 of FTSE double-short ETF when the FTSE costs 100. First day FTSE goes up 10%. It's now worth 110, but you just lost 20%, so your ETF is worth £80. Next day market dives by 9%. It's back to 100. Your ETF rises 2x9%=18%. Your ETF is worth 1.18*80 which is 94.4.

So in two days the FTSE has not changed its value but your ETF is down more than 5%. That's not good. Now obviously, the moves are not going to be so big each day but 1. after many little moves you will as surely lose money and 2. given the market is so volatile those losses will be much larger than they were back in January/February, say.


About the only thing that will save you is a near-term violent fall in which you close your position. Then you might get your money back or even a bit more. But without the golden timing this trade is bleak at the moment.



If you want a short punt, I think short futures look a much better bet. But I prefer to get paid to just wait and see in these conditions (almost taking the other side of your trade). Future direction is hard to pick, IMO, and for the FTSE in particular the path of least resistance is up: some parts of it still look really bombed out.


GS

Thanks for this.

I am still in the money but my thinking is definitely aligned with yours.

I will not hold beyond this week.

John

You will be pleased to hear that I sold out today for a small profit after a 4% rise felt too good to refuse.

Obviously we can now all expect a major fall in the markets!

John

[TheMotorcycleBoy]

Personally, I don't do shorts. But if you listen to recent US news coverage online and youtube (e.g. MSNBC, CNN) they are talking about massive new cases of cv19. E.g. last week I think FL beat NY in the number of new cases in a day, and their country-wide daily new case curve has risen further than it's last peak in April.

https://www.worldometers.info/coronavirus/country/us

perhaps a sell off on monday?

Matt

[GoSeigen]

You will be pleased to hear that I sold out today for a small profit after a 4% rise felt too good to refuse.

Obviously we can now all expect a major fall in the markets!

I'm pleased for you John, not for me**. Well done for the profit. Whenever one trades there will be some sort of regret afterwards: if the market shoots up you'll wish you'd immediately bought a long tracker with the cash!

BTW, I thought your market call was fair enough, just the method of shorting was better for the executive yacht fund than your own pocket. You could replace with a standard short EFT like XUKS which doesn't suffer from the same defect and ironically enough will probably deliver a similar, maybe even better return with less precise timing needed (unless there's a crash imminently).

Finally, kudos for the ability to review your own trading decisions and adjust. That's a mark of a good investor.


GS
P.S. **But yes, it's nice to feel you might have helped someone, or at least that they thought you did!!

[GoSeigen]

Well, the S&P has strongly broken out of its range. FTSE is following the US skyward. The VIX has finally decided to drift back to normal (but still elevated) levels and the Put-Call ratio is strongly in favour of calls. My short straddles are under water for now, but the call leg of a long SEP straddle I bought right back in March is finally in profit (the put leg was closed out long ago).

This all has prompted me to take a first tentative short call writing just a few ATM (3150) Aug S&P calls. Will add if the market continues making new highs, but also will be looking to close the put legs of the short straddles to free up margin. No point doing it too soon though because their value is dropping rapidly.

GS

Having closed most of the put legs on my short straddles I started the week very heavily short (mostly Jun) calls with strikes all the way down to 2800. Today's falls are welcome as the Jun contracts will rapidly lose value and I can close them out or let them expire next Friday. 2825 or lower next Friday would be ideal...

Opened a long Dec straddle today as the vol curve inverted.

GS

Turns out 2825 was a fantasy. S&P opened at 3161 at expiration today so most of my short calls were in the money. I decided to roll them into short index futures given the high level of the S&P. That might be premature but I am elsewhere leveraged long UK and international stocks so happy to start hedging a bit. This is a directional call, the first time I've felt comfortable about it for some time. Depending what happens I may trade short straddles again. VIX is still pretty high.


GS

Wrote Jul S&P strangles today. I still can't call the direction here. Implied volatility remains very high. I'm long UK stocks, short US futures so don't really mind which way the market moves.

With a good downward move I'll look to close any Jul short calls, write puts or buy Mar 2021 straddles.
If an upward move will close Jul puts or write calls, maybe take profit on some long stock positions.
If sideways, will just get a steady stream of premium from the options, most positions are in profit now.


GS

[zico]

Having closed most of the put legs on my short straddles I started the week very heavily short (mostly Jun) calls with strikes all the way down to 2800. Today's falls are welcome as the Jun contracts will rapidly lose value and I can close them out or let them expire next Friday. 2825 or lower next Friday would be ideal...

Opened a long Dec straddle today as the vol curve inverted.

GS

Turns out 2825 was a fantasy. S&P opened at 3161 at expiration today so most of my short calls were in the money. I decided to roll them into short index futures given the high level of the S&P. That might be premature but I am elsewhere leveraged long UK and international stocks so happy to start hedging a bit. This is a directional call, the first time I've felt comfortable about it for some time. Depending what happens I may trade short straddles again. VIX is still pretty high.


GS

Wrote Jul S&P strangles today. I still can't call the direction here. Implied volatility remains very high. I'm long UK stocks, short US futures so don't really mind which way the market moves.

With a good downward move I'll look to close any Jul short calls, write puts or buy Mar 2021 straddles.
If an upward move will close Jul puts or write calls, maybe take profit on some long stock positions.
If sideways, will just get a steady stream of premium from the options, most positions are in profit now.

GS

Grateful if you could explain your thinking here (and maybe some basic principles about option trading - I have traded in them many years ago, but it's always useful to get views on underlying principles.)

My understanding is that unlike most other stock market investments, options are simply a bet against other people in the market, and have no intrinsic value in themselves, but there are 3 ways to make (or lose!) money from them (and of course, various combinations of these factors).

A) Getting the direction right. So buying calls and then seeing the market go up.
B) Getting the volatility right, when others underestimate it. So buying calls and puts, and then seeing lots of wild see-sawing in the market, so making money on both.
C) Getting the timing right. So buying a short-dated call just before the market moves up.

If I've understood you right, you think the options market is underestimating the volatility of markets, so pretty much all calls/puts are underpriced - is that correct?

Also, unlike straightforward betting, is there something about options markets where perhaps big institutions are affecting the price in such a way that there are clear opportunities for small investors? (Defining "small investors" as <£100,000 trades!).
The kind of example I'm thinking of is where big investors are staying more or less fully invested, but hedging their options by buying puts.