Blue Horseshoe Loves This Finance Blog

Markets finished off a wild week today with the S&P losing -0.92% on the rising possibility of Great Britain leaving the European Union; more commonly referred to as the 'Brexit.'  The move comes just one week after the U.S. printed a payroll report that was disappointing to politicians and economists, but welcomed by the market as it gives cause for the Fed to kick the monetary policy can even further down the road.  Market chatter is now suggesting the next Fed move may likely not come until December... a full year after the last rate hike.  Britain's shenanigans will only serve to complicate matters further; but for now, the U.S. dollar has been subject to some dramatic whipsaw volatility as a result. Today's price action served as a stark reminder that global macroeconomic risks still pose a threat to domestic markets as they attempts to breakout to new all-time highs. GIMME SHELTER Here's the USD chart: Last Friday's move shocked the greenback out of it...

Based on the moves in the dollar over the past month and the fact that there is still global glut of supply, I've developed a bearish view on oil at its current levels. Earlier, I posted a call ratio backspread on the SCO (a levered inverse oil ETF) approach to capturing a downside move, but oil is still in a technical bullish trend pattern and has plenty of support to break through before it forms a bearish breakdown pattern.  While that trade would not have lost much, it's looking less likely that it will develop the momentum necessary to be a winner. Therefore, I now suggest capturing some call premium by entering into a vertical bear call spread on the September USO call options.  Here's the trade: Short: September USO $12 Calls at $0.84 Long: September USO $16 Calls at $0.11

TRANSFORMING RAW DATA INTO INSIGHT & ACTIONABLE INFORMATION After reading the book Moneyball for the first time, I built a factor model in hopes of finding a way to finally be competitive in my fantasy baseball league - which I had consistently been terrible at.  It worked immediately.  By taking raw data and turning it into actionable information, I was able to solve a problem that had long perplexed me.  It was like discovering a new power.  What else could I do with this? Today, I build models for everything and have come a long way since that first simple spreadsheet but still use a lot of the same concepts. To build a traditional factor model, you would regress a dependent variable against a series of independent variables and use the resulting beta coefficients as the factor weights... assuming your resulting r-squared and t-test showed a meaningful relationship of course. Variables typically fall into one of two categories... continuous or dichotomous....

HOW SELLING SHORT-DATED OPTIONS IMPACTS RISK ON POSITIVE GAMMA POSITIONS WHY PAY RETAIL? One popular options trading strategy is the calendar spread where short-dated and, generally, lower absolute delta options are sold to finance options with longer-dated maturities and higher absolute deltas.  The intention is to reduce the purchase price of the long-dated option, but the structure also impacts the risk/return profile of the position  and the passage of time makes that relationship more dynamic than a traditional long or short option by itself.  To illustrate the point, I built out the Optimized Positive Convexity model to account for variable maturity positions. http://tancockstradingblog.blogspot.com/2015/08/follow-up-on-qihu-short-trade.html I structured a bearish position around the SPY  which I fully expect to breakdown in the coming days and weeks. The position is composed of the following legs and the risk profile at inception is reflected in the chart bel...

MARKETS ARE SET UP FOR ANOTHER FALL   Equity markets are setting up for their third bout of pronounced volatility in the past ten months as a confluence of factors form like storm clouds on the horizon.  Global macroeconomic concerns, domestic rate expectations and bearish technical indicators have been going concerns for several months; and while they're certainly not mutually exclusive, all three factors are now flashing red at the same time! CHINA The issue of China's slowing growth and mounting debt are nothing new... http://tancockstradingblog.blogspot.com/2016/05/is-china-next-japan-continuing-case.html However, China related stocks and ETFs had enjoyed a small relief rally... until recently that is.  Anything associated with the country is under fire again and not even huge investments from Apple can seem to save them. THE DOLLAR Similar to Chinese stocks, the dollar had recently reversed its own longer trend... it just so happened to be a bullish one.  Howeve...

The Dollar is showing signs of strength which has already had an adverse impact on non-energy commodities... if it continues to rally, oil is likely to be adversely affected as well. Here's one way to play it. SCO is a leveraged inverse ETF on oil and can swing wildly when oil is falling.  By using a call ratio backspread, we can virtually eliminate the downside if oil does not break down and capture an exponential upside if it does. Here's the trade: SCO is trading at $80.72 USO is trading at: $11.9 Short 1 June 17 $75 call at: $16.1 Long 3 June 17 $100 calls at: $3.4 Long 4 June 17 $110 calls at: $1.95 Breakeven price is approximately $111 Max loss is $2,700 If all options expire worthless the total loss would be $190 SCO at $150 would represent an approximate gain of 10x mas risk

APPLE STOCK IS BREAKING DOWN Apple is trying desperately to prop up its stock... but buying back more than $100 billion worth of shares in the last year and increasing dividends to record levels isn't helping.  After Q1 results that beat estimates, reports of supplier cuts lead investors to dump shares as it signaled iphone demand is crawling to a halt. Furthermore, the technical pattern is setting up for a good sized breakdown: Apple is obviously a large component of the technology sector which continues to lag the broader market and is also in a technical breakdown pattern.  If the broader market comes under stress, it could be a bumpy ride down for Apple shares. Here's a bearish Optimized Positive Convexity trade for AAPL: The projected return for AAPL to the June 10th expiration is -11.13% The implied volatility is for the at-the-money put is a staggeringly low 20.4% vs a projected volatility of more than 27%! This is also the day before a large dividend is to be paid out....