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While the World Watches Greece THIS is Happening
By Chris at www.CapitalistExploits.at
Watching the ongoing Greek saga unfold is enough to make a blind man grimace. Capital controls which could be seen coming down the track like a freight train are but one more notch on the disaster stick called European Monetary Union.
Why talk of Greek debt negotiations is even taking place at all is the height of absurdity. It's akin to discussing how large an area of the desert should be dedicated to growing lettuces. The answer which no Eurocrat is prepared to acknowledge is, "Who cares? Nobody should be so daft as to grow lettuces in the desert".
Let's all be honest, shall we. What we're talking about here is foreign aid. It's not about debt repayments. Nobody is getting repaid. Anyone still clinging to that hope is simultaneously still waiting for Santa to come down the chimney, the Easter bunny to show up and for "liberating" forces to find weapons of mass destruction in Iraq.
Let's just table debt talks, call them what they are, which is foreign aid, and move this thing along. The problem with acknowledging the ugly truth is that German banks would then have to write down those "assets" on their balance sheets: "Jeez, it'd just be so much easier if we could keep them at par value and ensure we pick up that bonus at year end. And so we must endure more saga and carry on this game of pretense".
While I could spend time on Greece, what I'm more interested in is what few are paying attention to while this Greek saga unfolds.
That is what is going on with the Chinese yuan.
We've recently made the argument for a weakening yuan. My friend Brad and I both went up against the yuan late last year and Brad detailed his thinking in October of last year, then again in December, where he delved into the Chinese banking system, and once again in March of this year.
That, ladies and gentlemen, is our current bias. We're currently short. It's important to establish one's bias early on in order to attempt to understand any argument, so now you have ours. Often fund managers are selling a product which leads them into making decisions which have more to do with an agenda than with sufficient critical thought.
Let me say therefore that we have an opinion right now. But since we are not selling any product, hopefully we can keep our minds open.
Let's see where we get to and then I'm going to show you why we have a decent crack at making money without having an opinion either way.
By many accounts the yuan is one of (if not THE) most overvalued currencies in the world right now. But there are just as many well thought arguments arguing the opposite saying that it is indeed undervalued.
Both sides have credible and well thought out ideas so let me attempt to summarise the most credible I've found.
Why the Yuan will Rise
Chinese policy makers are unlikely to let anything take place which rocks the yuan exchange rate boat.
The yuan fell to 6.28 in early March of this year before the PBOC stepped in and threw $33 billion at the "problem", reversing the decline and sending it back up to where it trades today around 6.21. They have around $4 trillion in reserves so if, like us, you're a speculator looking at firepower this is well worth looking at. Clearly the monetary authority is prepared to dip into their vast currency reserves to offset capital outflows and stabilize the yuan.
The IMF discussions around including the yuan into the SDR basket of reserve currencies (currently the dollar, euro, yen and pound) is something which China has long been courting. Right now, the yuan has posted it's biggest monthly advance since December 2011, on the heels of or in anticipation of inclusion in the SDR basket by the IMF.
Amongst other things, what is required is for the yuan to be "fairly valued". Wild swings in the yuan - whether up or down - would kill their chances of joining the hallowed ground of the other terrible units of payment.
In order to meet their criteria it's essential that the yuan remain stable. Another IMF criteria is that the currency is "freely usable". In other words, free floating. I'll come back to this in a minute as I think it's something overlooked by many observers.
Why the Yuan will Fall
On the other side of this argument is the fact that China's economy is slowing and is facing increased competition from regional players, such as Japan, who are playing the currency card, devaluing their currencies and sucking up export market share.
A weaker exchange rate would help boost exports and while China is certainly moving towards a domestic consumer supported economy, they are not there yet and manufacturing and exporting to the developed world is still their "bread and butter".
Remember I mentioned that part of the IMF criteria is that the currency float freely?
Well, many believe - and perhaps correctly - that when (or if) the yuan is added and floats freely there will be an almighty rush INTO the yuan. I've seen few who believe that this wouldn't at least in the short-term allow the opposite to happen.
Consider for a moment that most Chinese have been going to great lengths to get OUT of the yuan. Does it not make sense that when they are allowed to do so there will not be a decent amount of them quite excited with the prospect of moving out of yuan?
In the simplest of terms the question boils down to the following...
Upon inclusion into the IMF and a subsequent floating of the yuan, does capital flow into the yuan or out of it?
The problem with China is that nobody knows the real numbers. Nobody!
What are the insiders doing? They're shoveling their money out of the country so fast it's going to catch fire from the friction. This is what the insiders are doing. That doesn't mean that suckers won't come in the other way and we get a strong yuan rally. It's certainly possible and maybe it's even probable.
Fortunately, the market is gifting us an opportunity right now and we don't have to make that decision.
I just got off the phone with Brad who told me about me the below pricing of an at the money call option on the yuan (or the offshore yuan, to be more specific). Currently, you're paying 2.5% premium for a 12-month call option.
Now, take a look at the below chart. You'll see that buying a 12-month at the money put we're paying just 0.3%. You can buy 100,000 USD/CNH puts for 12 months at the money and it'll cost you a mere $300!
To break even on the first trade we need the currency pair to move by 2.5% in our favour within 12 months and on the second trade we need the pair to move by just 0.3% to break even. Pardon me for saying so but that is almost as insane as the Eurocrats discussing Greek debt.
Buying both is what traders term a "straddle" but don't get hung up on terminology. The point is that for a 2.8% premium (2.5% + 0.3%) we can hold both positions. We don't much care which way it moves but simply that it MOVES!
What could make it move? Well, inclusion at the hallowed table of disreputable currencies currently making up SDRs or of course non-inclusion.
Either of these events have the potential to create capital flows one way or the other causing the USD/CNH pair to move substantially more than a mere 2.8%.
Or any of the reasons we delved into in our USD Bull Market report where we detailed why we are short the yuan.
I'd suggest we're likely to see MORE not LESS volatility over the next 12 months and the current lack of volatility being priced into the market is just the sort of golden gift which Brad looks for.
- Chris
"Eppur si muove (And yet it moves)." - Galielo Galilei
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Well, this used to be an economics site, and I found the thread to be pretty useful.
Another set of good arguements on why not to feed the beast.
Buy miners, look for underground, highgrade late stage development projects with lots of cash in post socialist countries (they may be less likely to go down the nationization route again).
Stash certificates in Bank of Sealy.
Wait patiently.
This site looks more like Craigslist everyday..
I've got an 18 year old Toyota Landcruiser that has problems starting in the mornings, it coughs and splutters a bit, but eventually fires up. It's O.K. later in the day, can anyone give me some advice?
Will you be my friend?
http://in.reuters.com/article/2015/07/03/videocon-brazil-oil-gas-idINKCN...
Videocon Industries Ltd (VEDI.NS) plans to invest $2.5 billion in oil and gas ventures in Brazil over the next two to three years, the consumer electronics-to-energy group's chief said, as part of its strategy to boost the business.
"Brazil oil finding is four times higher than the largest oil field in India ... It's just (the) beginning," billionaire Venugopal Dhoot told Reuters at the sidelines of an industry event.
A consortium that includes Videocon and Brazilian state-run oil company Petroleo Brasileiro SA (Petrobras) (PETR4.SA) earlier this year discovered new light crude oil in the Sergipe basin off Brazil's northeast coast.
Videocon, which gets most of its revenue from its consumer durables business, has expanded its oil and gas business in recent years with investments in countries including Australia and Indonesia.
In the next three years, Videocon, which also has interests in telecoms and power, will be known as an oil and gas firm, Dhoot told India's Mint newspaper last month.
Tell me he didn't just make a very strong case for stability (joining the IMF and the China reserves to make that happen) then place a bet on volatility.
Is Brad the author's boyfriend? At times, this essay reads like a teenage girl's texting thread.
Do 'Chris' and 'Brad' know they can get married in the U.S. nowadays?
I Make money of straddles nearly 90% of the time, plus! Just check my website at www.straddles4thewin.com to learn how you can win too!
The dude probably does not know the direction of the Yuan like everyone else. So he had to publish an BS article to convince himself that he should short yuan - good luck!
Geez, didn't Nobel Prize winners heading up Long Term Capital Management try that sh*t a long time ago, and we all know how that turned out. The only way to win for us non-members of the sociopath club is NOT to play. Why feed the Great Red Dragon?
From my original post.
'I have made money from his advice, but I'm not so sure how accurate his 90% figure is. I can't find any info about option success or failure rates anywhere.'
I understand how straddles work. But my concern is that no matter how safe a straddle appears, it has never worked for me. I've used them under a whole lot of differing market conditions.
I would just like to ask a question if I may, because my experience with options is limited.
Can anyone who dabbles in options on a serious level confirm or deny this 90% figure that my broker keeps hyping on about, and if you can, do you have a link that you can provide? If any one can help, it would be appreciated.
"...His claim was that more than 90% of options expire worthless..."
Don't take this the wrong way, dumdum, but why the fuck are you asking us? Doesn't your broker have the internet? Can't he back up his absurd, WRONG claim? Call him up right now and tell him to go fuck himself, and that you'll never use his uninformed ass for another trade as long as you live and that you can't believe he even got his securities license thought any legitimate means (he probably doesn't have one). Then close all your positions and your account COMPLETELY and have them send you all your money as soon as possible. Take that money down to your local gas station and spend it ALL on scratch-offs. Your chances are better and you'll lose money less quckly.
Your question can't be answered easily because the total outstanding in-the-money puts and in-the-money calls on expiration is unknown with any precision vs. the number of out-of-the-money puts and calls on a stock-by-stock basis, much less for the entire market on expiration. It constantly changes anyway. I would guess it's a hell of a lot closer to 50:50 than it is to 10:90. It's irrelevant anyways - the goal of many option strategies is precisely to have the option expire worthless in order for you to make money. If you don't understand that part, then stick to scratch-offs.
If you insist on screwing around with options, then open a practice account at one of the on-line options places. This can be done with a minimum of information and SHOULD be 100% free - if they ask for a dime, then go somewhere else. Then start opening straddles, make notes why you opened them an why you think they'll make money. Watch them decay right up until expiration taking more notes. If you can understand what's happening with your paper trades and actually MAKE money on several consecutive trades, then you may want to consider gambling your family's money. You will lose it, but at least you'll understand WHY you have impoverished your family. Good Luck!
Paveway IV
Thanks for your response. I've already questioned the broker about it. The reason I'm pushing this issue, is because he cannot provide figures. I am assuming his comments are based on experiences at his firm.
Personally, I've already searched the net without any results.
I appreciate the time you've taken to clear this up for me. The thing that makes angry, with this article written by Chris, is he makes it sound so simple to make money from Straddles.
Gents, to be clear straddles are a terrible idea most of the time.
Why I believe that the risk reward relationship is worth it in this instance is simply due to the fact that the market is pricing in a world where literally nothing happens in this currency pair. This we see in the pricing of both puts and call options. Now it's entirely possible the market is correct and I lose all my money. I know what my loss is and at the same time I don't believe it unreasonable to expect volatility given the macro factors globally let alone the possible inclusion of the yuan into the heralded basket of currencies.
Someone mentioned I do this since I have no idea where the market is heading. NOBODY knows where the market is going. That is the entirely incorrect question to ask. Even if you know which way the market is heading (and we all have an opinion) THE most important thing is identifying the risk/reward of taking any position. In the above instance the market is telling me that this is interesting. Go take a look at historical vol on this currency pair and you'll see this is an anomoly.
Thanks for the extra explanations, It is appreciated.
I think you misunderstand PW. If your broker makes an outrageous claim, you call him on it, and he can't back it up... well, why is he still your broker and why are YOU the one looking for proof of HIS argument as some sort of justification for your being a pansy and not firing his ass yesterday already.
I do understand what PW was getting at.
The thing is, there is no malice between the broker and I and I've been with this mob for a long time. I don't believe there was an act of deception on the brokers behalf.
I did a string of straddles with him and lost a shitload of money. Not one of my straddles worked. He saw that I was struggling with options and offerred me an alternative. Mind you, the straddles I initiated were not recommendations from the broker. I read an article in some financial publication, that explained risk minimisation by the use of options. The Straddle idea kind of took my fancy.
Anyway he recommended that I try selling short dated options that are close to expiry and collect the premiums. The thing is, under his guidance, we were making money on a regular basis. If a trade appeared to be going wrong, we'd exit the option before our losses got too large.
As you probably know, when selling options (calls or puts), your theoretical monetary loss is unlimited.
"...The reason I'm pushing this issue, is because he cannot provide figures..."
He can't and nobody can. It's about 50:50 plus or minus 25%. It doesn't matter TO YOU unless you artificially limit your options strategies to only buying puts or calls that you want to expire 1) in the money at 2) a greater price than you paid for them. In other words, you're looking at options like a regular stock or FX trade with an expiration date. That's the wrong way to think of them.
Options are a hell of a lot more complex than that - you're not just guessing the right movement in underlying price, but also competing with OTHER options traders who are pretty damn good at outguessing you (or your broker). The person selling you the option 1) has way more money than you, and 2) is a pro at fleecing other less competent options traders = you. They are willing to sell you a straddle (technically a long straddle) on something because they think they can make money on the exact opposite postion: a short straddle (simply speaking - it's more complex than that). If nobody thinks they can make money on a short straddle, then you wouldn't be able to buy a long straddle - nobody would sell you one. If they think they might have a little chance of making money on a short straddle, then they might sell you your long straddle, but at a significant premium - enough so they figure it's either worth the risk or worth the additional cost of hedging that trade with other positions. You have no idea which one or why.
You're not buying a straddle from the ether - someone WANTS the other side of your trade. There is always a counter-party that thinks 1) you are wrong and 2) they are right.
Now they're probably way better at this than you, so why would you pay what they're asking or even take the bet? They're not going to cut you any slack - take it or leave it at their price. And depending on your broker, you may actually be betting against THEM. They may gladly take the opposite position and sell you your straddle if they figure they have a better chance of making the money than you. Maybe it's some outside firm - who cares? Anyone selling you a straddle is betting one-on-one that you will lose money and they will make money. Are you really, on average, smarter than those guys?
"...Personally, I've already searched the net without any results..."
That confuses me unless you're looking specifically for FX options. I wouldn't expect there to be AS much on FX options - the few people that use them are already pretty knowledgeable. In principle, it's the same thing as equity options with regard to strategies like saddles. That's in principle only - FX options are not EXACTLY like equity options, but the nuances in terms are another whole subject.
Still, a simple Google search on the terms 'fx options blog' brings back over 3.8 million pages. You couldn't find anything useful in any of them? If you're looking for something brief and easy to understand on FX options, there isn't any. That's my point.
"...The thing that makes angry, with this article written by Chris, is he makes it sound so simple to make money from Straddles..."
First, this is a very specific straddle with a seemingly low premium - this article does NOT suggest some generalized easy money on any or all USD/CHN straddles. Chris is pointing out that the people that will sell you either side of that particular straddle SEEM to be selling them cheaper (at a lower premium) than Chris thinks the future rate moves dictate. What you don't hear is why the people willing to sell you that straddle think the way they do. Are they stupid? Do they know something Chris doesn't? Did they overlook the real potential here? Worse yet, did they jack up the premiums BECAUSE Chris pointed it out? Maybe you can't get it at 2.8% any more. Is it worth it at a higher premium, say 6% now? (no idea what it really is) The point is that (in simple terms) someone is thinking they can make money on the exact opposite of what Chris is saying. Chris makes sense, but I can't see his book. Is he right more often than wrong? I have no idea.
I hope Chris bought a boatload at 2.8% and hope he makes a fortune. Of course he's going to be optimistic if he's pointing out what seems like a good trade to him. He makes sense and I enjoyed reading his thoughts. I'm still not running out next week and buying USD/CNH straddles, though.
dumdum
IMO the key to understanding your question is in what happens to the open interest of options when the go in the money. Assuming we are talking about American style options that can be exercised prior to expiration, options that go deep in the money get exercised prior to expiration to free up capital.
So when you take a snap shot of the outstanding options at expiration it looks like there are few winners and a lot of losers.
Of course, strictly speaking all options expire worthless. Because if they have intrinsic somebody has to exercise to get paid. Except for the cash settle index options.
So what I am getting at is you are not asking a pertinate question. Yes it appears that selling vol makes money more consistently than buying vol.
It is easy to pick up nickels in front of a slow moving steam roller, until you trip over your own feet.
Also, some capital put into options is a hedge. In this instance the buyer might actually be winning by losing. So does that mean you count his trade as a sucker bet?
But beyond this open interest phenomenon, there is also the concept of how much capital is commited to what type of options. Since there is a large number of options created in the shorterm that are of very little value, they do largely expire worthless but added together their total value is relatively small- while longer term and in the money options that represent much fewer contracts but they add up to a lot more capital, are really less speculative and are more like a proxy margin position. This second situation also makes it easy to overstate this percentage of contracts expiring worthless claim because it is counting contracts and not capital.
Also the time frame assigned to your perspective can be misleading. While selling vol always looks good in the short run, the black swan does happen just ask Nassim Taleb.
TimmyM,
I had to read your post several times to understand. I think I've got it.
This broker was encouraging us, myself included to sell out of the money short dated futures option puts or calls, where you would receive maybe 5 to 10 pips (each pip $25.00) per lot as a premium. We would then hold them to expiry and as long as they were out of the money on expiry, we would keep the premium.
I'm guessing that the broker may have been referring to this type of situation when quoting a 90% worthless expiration. I don't have any grudges against the broker, I think he was simply showing us a way to trade options in a much 'safer' (and I do use that word cautiously) way and at the same time generate additional commissions for himself.
Thank you so much TimmyM
Sorry I can't help d. I used to trade on the FX a few years ago and lost every damn cent I put in. They had the audacity to take out my last $35 after I took a vacation for a year. Bastards. I have great respect for anyone that has the balls to do this and make money.
While the World Watches Greece THIS is Happening
USD/CNH straddles? Er... nope. THIS is what's happening. Tunnels, baby.
Everyone keeps saying this market is about to crash, but it never comes!!
What does look to be in trouble is the GOLD CHART here. ==> http://bit.ly/1fMcakI UH OH!!!
And to think I listened to those dummies from CNBC who keep saying that GREECE will crash the market, but they keep going on and on
and every time they say something, its pure BS. If you do the complete opposite of them, you would probably make some money. Fancy that!
Tried these straddles a few times to no avail. The theory looks good, but in practise, for me anyway, they never seem to work out.
A broker once told me that selling puts or calls can produce better results for your trading account, if a bit of common sense is employed. His claim was that more than 90% of options expire worthless.
I have made money from his advice, but I'm not so sure how accurate his 90% figure is. I can't find any info about option success or failure rates anywhere.
A common fallacious claim that has been regurgitated ad nauseam is that 90% of options expire worthless, and that therefore it is better to be a seller of options than a buyer of options. This claim misstates a statistic published by the Chicago Board Options Exchange (CBOE), which is that only 10% of option contracts are exercised.
But just because only 10% are exercised does not mean the other 90% expire worthless. Instead, according to the CBOE, between 55% and 60% of options contracts are closed out prior to expiration. In other words, a seller who sold-to-open a contract will, on average, buy-to-close it 55-60% of the time, rather than holding the contract through to expiration.
So if 10% of options contracts end up being exercised, and 55-60% get closed out before expiration, that leaves only 30-35% of contracts that actually expire worthless. The big question is: of the 55-60% that get closed out before expiration, how often did the option seller profit, and how often did the option buyer profit?
http://sigmaoptions.blogspot.com/2009/07/90-of-options-expire-worthless....
That's a hell of a lot of wind to end up justifying a fucking straddle based on "volatility". Don't quit your day job bro!
Fuck off dick head.
I gave up my day job 25 years ago, you were most likely still in nappies. I don't recall professing to be an expert on options. I was simply putting forward a point of view, with the hope of obtaining some insight from another member.
This site would be so much better without wankers like yourself.
Wankers. Then you must be a fuckimg useless Brit. The world has rarely seen such an insidious race of half breeds. You and your fucking once world wide empire and your still operating Lord of lords Bank of England. So you quit your day job to play in the markets and currency swaps. You're the same piece of shit as the elites. A little turd in the cesspool of life with all the big turds floating around you. You have never produced anything in your life worth having and of any worth. You're nothing but a two bit gambler desperately trying to skim scraps from your Masters' table.
Choke on some bangers and mash, you bloody wanker.
Yes I am a Brit.
Judging by your tone and the level of hostility, I'm guessing you've missed the entir bull market that started almost a decade ago. It doesn't pay to be a perma bear.
You have a serious problem. I strongly urge you to go and seek anger management therapy.
dumdum, I think Tahoebilly might have been refering to the author of the article.
*
Garypaul,
I'm not sure, but if you are right, I sincerely apologies to Tahoebilly.
His/Her comments were posted as a direct reply to my comment, and assumed he or she was referring to me.
the first thread tends to be comments about the article even though that isn't what it's supposed to be.
everyone wants to be first or at least near the top.
the proof is you weren't justifying a straddle based on volatility and the author was.
Thanks Jeff,
I understand what your are saying.