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mercredi 29 décembre 2010

The risks of trying to play catch-up:Money managers & Portfolio managers,just a bandwagon of...

The risks of trying to play catch-up

Money managers & Portfolio managers are just a bandwagon of ..dumbs. just to be nice and caress them.  Most of them don't want to be left behind by the markets. They do not understand that markets have 2 directions :Up and  Down, not just one UP. Laterality, non moving sideways markets... this is not a physic concept: the lower you go in time frame the bigger the movements you find. So they  care for  stuff, to bid on. Always...

I'm using here SPY ETF for  the "event" is based on it...
And rallies ( fake ones or real ones? which one is true? and how you call a correction of more than 50% of the  leg north headed....?)  can make portfolio managers even more nervous than...inevitable  selloffs. Just because selloffs do not exits for a Portfolio Manager, are classified in a cognitive dissonance process as aberration of their "assumptions". Yes," underperforming the market averages will lose clients fast, which is why so many "money managers" are really just passive indexers."

And f.....g paid for it. Hard to believe but true. 

So those who have missed the move up may be eager to get into the market but also hesitant to buy into such strength. And while options can provide an alternative to buying shares outright, you must be careful what risks you take on in the process

All of this brings to mind a trade from a recent episode of CNBC's  " Option Action"" Dan Nathan suggested a "call spread risk-reversal," which is the sale of a put to finance the purchase of a call spread. It is a bullish strategy that bets the stock will rise to the short-call strike of the spread. 
SPYThe specific trade is the purchase of the SPDR S&P 500 (SPY) December Quarterly 123/126 call spread for $1 (buying the 123 for $1.50 and selling the 126 for $0.50) and the sale of the 117 puts for $0.80. The total cost for the trade is $0.20, and the trade can make $2.80. 
But the 14-1 payout they discussed is a bit misleading because the margin required on the short puts will be more than that and the trade can lose more than $0.20. So while the "worst that can happen is getting put the stock at $117" because of the short puts, the loss would be $5.20 if the SPY drops to $112.

The trade is, as Nathan admitted, designed to "play catch-up." Some of the other traders raised some issues with the strategy--most notably that it is net short options, which might not be a great idea with the VIX at multi-month lows.

The volatility index usually moves inversely to the S&P 500. So typically when the implied volatility for the S&P 500 (which is what the VIX represents) is low, you want to be a net buyer of options, not a seller.

It is true that if you are going to buy the SPY to play "catch-up," this is likely a better structure; you risk only $0.20 as long as the SPY holds up above $117 through the end of the year. But be clear that the real payoff is not 14 to 1.

Adding to the complexity, the VIX is at its lowest levels since April but still can go much lower. Despite host Melissa Lee's opening remarks that "it has never been cheaper to catch up to markets and it has never been cheaper to protect your portfolio," the VIX is still well above the 2007 lows that were below 10.

Here's a thought: Why not stick with just a simple limited-risk call spread instead? Much too complicated for the Portfolio Manager...

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