Posted: December 7th, 2008 | Author: Wayne Weddington | Filed under: Opinion, Strategy | Tags: global macro, global opportunity, intervention, Trading | 
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“People have married for many reasons — to gain a fortune, accumulate land, forge an international alliance, secure a dynasty, raise children — and even on the account of affection, a marital motive that became widespread rather late in human history with the rise of bourgeois society.”
- Randy Cohen, The Ethicist
Yes, it is true. I just got married…. but it is not what you think. I have not had any formal nuptials.
My “wife” is the alternative strategy we have employed in order to navigate the current global market conditions. It feels like I am on “call” 24/7… and I certainly talk to the traders more than I speak to my significant other (which has caused some chafing). My voice is hoarse at the end of each trading day. It is decidely counter-culture to traders’ increasing use of IM and email, obviating the need to talk. These days we talk all the time, all day.
In the last year I launched a global futures trading strategy, Global Opportunity…. out of necessity. The strategies of which I was once an avid purveyor — stat arb and long short equity — are still viable but today’s fat opportunities are availed to current-condition-specific strategies such as distressed debt and global macro.
The interest in distressed debt reflects investors’ sentiments: why buy equity products when you can buy debt, which is further up the food chain, at cents on the dollar? Global macro has also been a favored destination because it enables fast and tactical movements of capital across the globe in a fast changing environment. Given the market rumblings which started in the 4Q 2007, Global Opportunity seemed a prudent thing to do.
I was skeptical at first. I admit I was a little hard on futures traders in Do it Yourself Hedge Funds (“DIYHF”). I referred to managed futures trading as little more than gambling and as proof of the point I showed that the comparative reward to risk was scarcely greater than buying a good SP500 index fund.
The truth — and I redeem myself in DIYHF by pointing this out — is that volatility-loving strategies have their place and time. And now is one of them. In fact global macro is one of the few bright spots in performance this year for some managers.
In my case, in Global Opportunity, we began trading the US equity markets intra-day using the mini-futures contracts in the SP500 and the NASDAQ. We go home at the end of every day flat, that means with no account positions overnight. Everything is in cash at the market’s end. It ensures that I sleep at night. Potential government interventions as they are, coupled with an increasingly unstable geo-political environment, are not contributive to a deep sleep.
We trade the intra-day volatility that has be-deviled so many managers this year. But the thing to which I have had to get accustomed is the nearly continuous interaction with the traders even though we employ a systematic trading strategy. Systematic trading strategies are supposed to be, well, systematic and automated. The reality is that even the best models require an even greater model — the human mind — to look over the shoulder and be alert. If anything ever does burp, you can be there with a napkin.
The result has been that my ear is practically glued to the phone. I would be better off with walkie-talkies: it would save the finger cramp from hitting the speed dial. Every day, really every hour, is a drama: watching Congress, the Fed, Obama, economic “numbers”, foreign markets, the TED spread, etc. The intent is that vigilance will enable us to trade against the other market participants, taking capital from their ledger and putting it in ours. It is after all a zero-sum result. Profits only come because you took them from someone else’s trading account by being on the profitable side of a trade. It is somewhat brutal… but I assuage myself by concluding that I have taken profits only from people I would not like. Because, after all, when I lose money I certainly do not like the miscreant who ‘took’ my capital either.
-Wayne Weddington
Posted: December 1st, 2008 | Author: Wayne Weddington | Filed under: Strategy | Tags: covered calls, covered puts, market meltdown, market volatility, synthetic options | Email This Post
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It is not only the market traders who share the anguish caused by the market turmoil. one friend writes:
“I think I should write an article too but from the standpoint of the wife of a hedge fund manager. I never thought that I would spend more time focusing on the “market” than anything else around us. I wake up with CNBC, I go to sleep with CNBC. Our life-style, our kids’ future, our home, vacations, my sanity! depend on “the market”, this absurd, violent ‘thing…’
Most investors and traders have taken a beating this year. As the market whipsaws to investors’ need for liquidity, or to run for the hills, or day-trading, or, yes, to double down, there have been few winners.
With a hint of fear and trembling in their voice, I have been asked many times over the last few months about what to do next in the market. It usually goes something like this: “my [wife] [husband] [f buddy] [domestic partner] [girlfriend] [boyfriend] [lover] [friend with benefits], one of the scared-y cats, is very nervous about the markets… a friend suggested selling everything, take the loss, and re-buy other assets (after the 31-day limit) or buy a call option to avoid missing any bounce-back… what do you think??”
Hm.
Well first of all, there is no absolute answer, because ten people in a room could all have a different path based upon their own capital needs, near-term and far. But there are some things you should not do.
I am not a fan of free investment advice, so please take my own advice with healthy skepticism. There are many voices on the cable shows devoted to financial info-tainment, but, despite their loud blather, they do not add up to much more than a whisper of usefulness. You and only you have a full understanding of your risk tolerance and your objectives. Nonetheless, irrespective of your detailed objectives, your probable intent is to earn returns and to stop losing money… so there are a couple things you can do on general principle.
If you need liquidity now, then there really is no dilemma. Sell. If you need cash now, the only thing better than cash is money.
If, however, you own a truly diversified portfolio of investment assets, then those assets probably do not represent “I need it now” money…. in that case, I would advise against it. Don’t sell yet. There are better alternatives.
Volatility premiums in the options market are very high. If you are willing to pay a premium in 31 days, after a liquidation event, then do not wait. You can construct a synthetic call option or put option based upon the current constituents in your portfolio. A call option can be constructed synthetically by being long the cash (stock) and buying (long) a put option. You can buy put options individually for each of the long stock positions in your portfolio or you can simply buy a put option on the broad index such as SPY… Look on finance.yahoo.com for short dated put options on SPY. Buy no more than 60 days out for expiration because you will pay more for the option the further out it expires.
Alternatively, probably what I would do given that the market’s downside is fairly, though not absolutely, defined at Dow 7500, is construct a synthetic put by selling call options against the portfolio. You can sell call options against each of your long stock positions: with volatility at all-time highs, the practice will capture a large premium per position, as much as 10%. This practice is called a synthetic put, or “covered call.” If prices move sideways, it will have brought in a cash return on the portfolio while holding onto the current stock positions. Try to sell the call options at 60 days or more to expiration in order to take in higher premium.
I like the latter because it allows the carefully chosen portfolio to hold onto otherwise strong companies even if the stock prices do not agree. It minimizes the downside while avoiding liquidation or trying to time the market. Clearly, if a portfolio is down substantially, it will take huge returns to get back to even, but blue chip stocks that have taken a beating will be among the first to roar back when the time is nigh.
The first strategy is mildly bullish, the second strategy benefits from short term sideways noise, the likely scenario for months to come.
- Wayne Weddington