Wednesday, July 22, 2009

Small XJO short as a trading hedge and selling CEU

I like the odds of a pullback to around 4000 over the next couple of days - the market remains overbought and momentum has drifted over the last 48 hours. So have put on small XJO put position (strike at 4000 - I hate paying up for volatility at the best of times, at least with a closer to the money strike you aren't fighting the smile). The plan is to trade out of it if the market does peel off, while hopefully the trading longs (BHP, WBC, QBE, NCM) will hang in there. See how we go.

Also, took half the CEU position off the table. The buying volume has picked up over last couple of days (looks like 1 buyer got things going yesterday with a volume bid around $0.35), and I can still see further upside from here. But as they say "you never go broke taking profits" and a 26% gain in a couple of months is a reasonable return.


  1. This market is exasperating - I've been expecting the rally to lose steam for a while now but it seems that it's quite happy to ignore economic reality. I'm now starting to see various pundits musing out loud about 4800 or 5500 or even 6000! Seriously, 6000 is just outrageous!

    I like the idea of your put, I think that this market is going to be one to trade.

    Also I see CEU copped a speeding ticket from the ASX, but had nothing to disclose. But taking some profits is definitely the right thing to do given the market at the moment.

  2. Was beginning to wonder where you had got to ol' chum...

    On the put, taking my lead from the fact that very few of the blog bears that I follow are left short in the market. Stephen Roach reckons this rally is a symptom of all the liquidity that has been pumped into the market...makes sense to me.

    Still to get the MXUPA by the way - saw that it made a nice leap up the other day - high yield bonds have been keeping pace with equities so not so surprising I guess.

  3. I've been here, just didn't want you to start thinking I was stalking your blog or anything (if that is even possible)...!

    MXUPA has had a nice little run this week, but like you say, high-yield bonds are trading almost as equities at the moment.

    I'm actually in the middle of writing a paper looking at the correlation of hybrid securities in the current market and comparing it to pre-2008. Early days yet, but it's not surprising that many of the hybrids exhibited almost perfect correlation with the parent stock over the past 18 months, compared to zero correlation previously (some exceptions of course, the bank hybrids performed as would be expected). No earth-shattering conclusions of course, just that diversification daoesn't work very effectively in times of market stress (I know we all know it, but it's nice to still prove it mathematically!).

  4. Be interested to have a look at it. Once upon a time my sole purpose in life was to originate hybrids...the rally from 2000 to 2005 had us constantly recalibrating what we thought was the 'fair value' spread.

  5. Will shoot you a copy when it's done (have to try and squeeze it in around work and life)

  6. hi PazzoMundo

    I am interested in a simple way to short xjo as a hedge. not so easy to do on IG markets (australia 200 cash) as it seems too leveraged and stopped out to easily. Dont want to use any complex option approach if I can avoid it as well. can you recommend anything? (I trade through commsec as well)

    thanks in advance for any help you provide



  7. Mike,

    Sorry missed your comment as I have moved home to

    I'm not licensed to give advice - so would be loath to put my neck on the block. The following comments are simply my personal experience of some alternatives.

    I'm not a big fan of CFD's as when I have used them in the past it seemed pretty expensive.

    The two ways I look to put on shorts are either through the futures (which are margined and subject to the stop out risk that you spoke of above) or through options. Understand options can appear complex and are illiquid - so I'd recommend getting some advice if you were to consider using them.

    If the objective is to keep it simple, a key criteria for my super fund for example, then I simply go to cash. It's not a short - but it ain't a long either. So, for example, my super fund increases its cash holdings if I'm bearish the market.

    Anyway, these thoughts are simply reflections of what I do, they are not advice Mike (for this as ASIC would suggest - see you advisor).