by ilene - December 15th, 2009 8:36 am
Courtesy of Mish
Curve Watchers Anonymous noted an interesting thing on Friday and again today. The long end of the yield curve is rallying or steady (yields declining), while the middle portion of the curve is selling off (yields rising).
This happened on Friday and again today.
Yield Curve as of Friday’s Close (2009-12-11)
[click on charts to enlarge]
Yield Curve as of Monday (2009-12-14 15:21 EST)
On Friday, the 2-year, 3-year, 5-year and 7-year yields rose, with the 5-year and 7-year yields rising more than the 10-year yield. The long bond yield dropped.
Today, the long bond (30-year) treasury yield is lower again, with the 10-year yield flat, while the 2-year, 3-year and 5-year yields are rising.
This is not normal action to say the least.
On December 11, in Yield Curve Steepest Since 1980; Hard Times Ahead in 2010 I stated "Judging from action in the 5-year treasury, it appears as if there is a long 3-to-5 year, short 30-year trade in play."
Here is a chart I made last Thursday, and posted Friday.
Yield Curve As Of December 10 2009
Flashback July 16, 2009: Pimco Says Improving Economy to Steepen Yield Curve
The difference between Treasury two- and 10-year yields may widen to record levels set last month as the U.S. economy recovers, according to Pacific Investment Management Co., which runs the world’s biggest bond fund.
“Long-term rates will rise at a faster speed than short- term rates,” Pimco portfolio manager Tony Crescenzi wrote in a report distributed by e-mail early in the Asian trading day. “Market participants decided months ago that the Armageddon scenario was out and stabilization was in,” he said.
The so-called yield curve steepened to as much as 2.62 percentage points today, the most in almost four weeks. It rose to a record 2.82 percentage points on June 5 as investors demanded greater compensation for the risk that growth will spark inflation. Just a week ago, investors said the curve would narrow on signs the global economic recovery was petering out.
Clearly that was a good play and I congratulate PIMCO.
Should the pattern from today and last Friday continue, it would be a reversal of a long 3-to-5 year, short 30-year trade in play.
Certainly,
…
Tags: computer algorithm, reversion to the mean, spreads, yield curve
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by Phil - August 28th, 2009 5:52 pm
The following is a collection of podcasts and videos from the Options Clearing Corporation and selected others.
The cover a lot of ground and new ones are occasionally added to their site. They are not as good as the coursework from MarketTamer, who are Option Sage’s excellent group but these are free (as opposed to $99 a month with Sage’s PSW special) so take a peek at the subjects that interest you:
First up is a very good introduction to options basics from Adam Lass, a very good overview. His next episode is the basics of call options – hopefully he’ll do more. Then we have the podcasts from OCC:
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Introduction to Financial Markets and Options Basics |
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Joe Harwood from the OIC Help Desk reviews some basic options concepts and terminology. Without getting into complicated jargon and abstract concepts, he covers options’ place in the financial markets, explains how they can be used in broad terms, and then slowly works into some of the first fundamental lessons.
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An Exploration of Basic Options Terminology |
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OIC instructor Steve Meizinger of the International Securities Exchange presents a review of the basics of options and how they can be used as a part of your investment virtual portfolio.
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Options Basics |
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Created from the Options Basics webcast utilizing new technology and interactive elements, this podcast covers options basics and is presented by Bill Ryan, a member of our OIC Help Desk (1-888-OPTIONS). From the history of options to the basics of puts and calls, Bill Ryan engages you in a webcast unlike anything we’ve offered before.
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Tags: Backspreads, calls, Collars, Dividends, Leaps, Options Education, puts, spreads, Straddles, Strangles, Trading psychology
Posted in Education | Join Member's Chat - 1 Comment Here »
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by ilene - June 8th, 2009 8:02 pm
[Free subscription to PSW, click here - it's easy - Ilene]
Constructing equivalent option positions,…
Courtesy of Minyanville, by Mark Wolfinger
One of the interesting features about options is that there’s a relationship between calls, puts, and the underlying stock. And because of that relationship, some option positions are equivalent -- that means identical profit/loss profiles — to others.
Why is that important? You’ll discover that some option combinations -- called spreads -- are easier, or less costly to trade than others. Even with today’s low commissions, why spend more than you must?
The basic equation that describes an underlying and its options is: Owning one call option and selling one put option (with the same strike price and expiration date) is equivalent to owning 100 shares of stock. Thus,
S = C - P; where S = stock; C = call; P = put
If you want a simple proof that the above equation is true, consider a position that’s long one call and short one put. When expiration arrives, if the call option is in the money, you exercise the call and own 100 shares. If the put option is in the money, you’re assigned an exercise notice and buy 100 shares of stock. In either case, you own stock.
Note: If the stock is at the money when expiration arrives, you’re in a quandary. You don’t know if the put owner is going to exercise the put. Therefore, you don’t know whether to exercise the call. If you want to maintain the long stock position, the simplest way out is to buy the put -- paying $0.05 or less — and exercise the call.
Example of Equivalent Positions
There’s one equivalent position that you, the options rookie, should know, because these are strategies you’re likely to adopt.
Take a look at a covered-call position (long stock and short one call), or S - C.
From the equation above, S - C = -P. In other words, if you own stock and sell one call option (this is covered-call writing), then your position is equivalent to being short one put option with the same strike and expiration. That position is naked short the put. Amazingly, some brokers don’t allow all clients to sell naked puts, but they allow all to write covered calls. The world isn’t always efficient (you already…
Tags: calls, Options, puts, spreads
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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