Pecunia non est radix omnium malorum.
“Money is not the root of all evil.”
The major stock markets in the U.S. began the day selling off for nearly 45 minutes, before strengthening for nearly the rest of the trading day, particularly in the last 45 to 60 minutes of trading. The VIX dropped -6.43% or 1.44 points to 20.95, the S&P500 gained +1.34% or +26.75 points to 2,019.42, the DJIA gained +1.1% or +190.86 points to 17,511.57, the S&PMidCap400 gained +19.98 points or 1.42% to 1,430.89, the Nasdaq Composite rose +64.56 points or 1.39% to 4,634.38, the Russell 2000 rose 1.90% or +21.95 points to 1,176.65, and the Wilshire 5000 rose +1.39% to 21, 244.68. Nearly all these major U.S. stock indices are roughly 3 to 3.5 percent off their all time highs, with the exception of the Nasdaq Composite which is no where near it’s March 2000 all time high of roughly 5,134, (even before inflation adjustments) and it’s been just barely under 15 years!
XLF (an etf of financials) rose +1.21% or 0.28 to 23.49, XLE (an etf of energy sector securities) rose +3.25% or 2.37 to 75.23. USO (and etf matching the performance of West Texas Intermediate) rose +5.04% or 0.88 points to 18.33. The etf USO is so volatile that I think it’s ripe for a straddle or strangle options strategy.
For educational & informational purposes, a straddle is where you choose the same expiration date, and you go long the at-the-money call and the at-the-money put; a strangle is slightly more dangerous and you go long one strike price away from at-the-money, basically you go long a slightly out-of-the-money call, and a slightly out of the money put. Strangles can have a higher return if the underlying security really moves one way or the other strongly, versus the straddle strategy. It seems nuts to novice options, to be long a call and put simultaneously, but if you believe the underlying security is going to “go up” or “go down” quite a bit before expiration, then this is the trade for you. I’d probably say to use expiration dates two weeks away, I think that’s where the best returns could potentially be had. The underlying security basically needs to appreciate MORE than the sum of the cost of the call and put, together in total. I used to trade this strategy, straddles mostly, but some strangles too, on “hype stocks” e.g. GOOG, GOOGL, PCLN, TSLA, FB, AMZN, AAPL, etc. Straddles work well on volatile securities. Some brokers like to trade straddles just before EPS reports, or one day before expiration on a volatile security, because the extrinsic value of the options is then mitigated and the potential for a quick and lucrative trade is possible. Of course trading ATM (at-the-money, or worse, out-of-the-money) options carry a substantial and high level of risk, if the underlying security doesn’t budge, and is relatively flat, you could literally, “lose everything,” and have a 100% loss. So this is not a feasible or viable long term strategy, or something practiced very often in institutional trading or asset management; Of course there are many options strategies that institutional clientele may really benefit from involving options and derivative securities, this (“this,” being straddles and strangles) however, in my mind, is not one of them.
Light Sweet Crude oil closed at 48.69 and finished up +5.28% or 2.44 per barrel, Brent finished up + 3.38% to 49.90 per barrel. Gold finished up +12.10 or +0.96% to 1,276.90 per ounce.
The Euro cross rate to the U.S. Dollar dropped -0.52%, indicating further Dollar strength, closing at 1.1567. This is the weakest the Euro has been since November of 2003. I believe the Euro has further to fall before stabilizing.
Treasury Securities were mostly down, after reaching record low yields yesterday. 30 Year Zeroes (as measured by etf ZROZ) were down roughly -1.49%, while conventional 30 year Treasuries (as measured by etf TLT) were down -1.27%, TIPS (Treasury Inflation Protected Securities, as measured by etf TIP) were down -0.56%. The conventional 30 year Treasury bond yield finished at 2.4462%, and the 10 year Treasury Note yield finished at 1.8308%.
The JPM EMBI was (as measured by etf EMB) +0.07% and is now just 4.74% off its all time high, the etf PCY was+0.04% and is now 3.83% off its all time high, etf JNK was +0.29% and is now 7.63% off its all time high, HYG was +0.38% and is now 6.14% off its all time high, and etf QLTC was +0.10% and is now 12.22% of its all time high.
I believe the high yield sectors of the fixed income markets are rallying along with oil, because there is representation of energy related companys’ bonds in those funds and bond indices, including the sovereign high yield. Sovereign high yield bonds are rallying due to some foreign governments who nearly own and fully control their energy sectors, e.g. in Russia and in Brazil.
By Andrew G. Bernhardt
Bernhardt Capital Management LLC 