How to Interpret Fed-speak

How to Interpret Fed-speak

Summary:The Beige Book is a great resource for investors looking for macro themes and insight into the Fed’s anecdotal inputs.The Fed has discussed implementing a “caps” strategy in order to reduce securities holdings.Short term traders might also be interested in the Fed Minutes for a specific trading opportunity.Everyone knows the Fed is data dependent, it’s a famous phrase used in all of their statements. “The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” as the Fed put it in their latest release1. But what should investors exactly look at when deciphering the Fed?Just like how technical traders base their decisions off a particular oscillator or how a fundamental investor gets an edge by following a particular section of an earnings release, the Federal Open Market Committee (FOMC) and market participants alike, digest numerous data points and anecdotes to paint a mosaic of the US economy and craft policy accordingly. Generally speaking, this comes from the 12 FOMC members, which is structured as follows: seven board governors, the President of the Federal Reserve Bank of New York, and four other reserve bank presidents. All FOMC members present their case on economic conditions. Moreover, non-voting reserve bank presidents also voice their opinion. Some of the variables these officials take into consideration can be found in two key releases.Many investors are already aware of these releases, but glance over them. Just about any economic calendar has these events highlighted, but lack mainstream in-depth following. The content of these reports doesn’t always move the market as much as an FOMC Meeting Announcement, energy...
The Calm before a VIX Pop: Options and Volatility Strategies

The Calm before a VIX Pop: Options and Volatility Strategies

Summary:Markets are near highs and volatility is near lows, historical data shows that a low VIX can be taken advantage of for short term trades.Seasonality of VIX closing prices vs. mean and median levels since 1990.Macro reasons to consider trading protection.Volatility is near multi-year lows as the major indices have been trading just under all-time highs. In February, the Dow Jones Industrial Average crossed above 20,000, the S&P 500 traded above 2,300 and the VIX temporarily broke below 10.This is all occurring at the same time macroeconomic uncertainty is quantifiably at an all-time high, the Fed and other global central banks are unwinding the biggest monetary intervention ever, waves of populism are electing new political administrations, and aggressive stock valuations are the norm.For context, the below charts quantify and depict a number of the above topics. Starting off with equity returns and current volatility levels.Low Implied VolatilityThe SPY (SPDR S&P 500 ETF Trust) is up 60% cumulatively over the last 10 years. As such, volatility derived from its options is near all-time lows. Other major products like the Russell 2000, Dow Jones Industrial Average, and NASDAQ 100 (as measured by the IWM, DIA and QQQ respectively) are also at relative lows implied volatility wise. Depicted below from Interactive Brokers (IB). (https://www.interactivebrokers.com/en/index.php?f=14099#tws-software)The VIX (Implied Volatility on S&P 500 30-Day Options) is another measure of volatility and complacency. As depicted below from IB, the CBOE’s VIX is hovering at 10-year lows. But what happens when the market inevitability has a hiccup? In the next chart, we explore what happens to the volatility of options on the SPY.Across the term structure (each...
Tech Trend: How to Play Cybersecurity

Tech Trend: How to Play Cybersecurity

Summary:The cybersecurity market is estimated to be worth $101-$170 billion by 2020 vs. $88 billion currently.The majority of executives and IT staff are not confident in their current infrastructure.By 2030, there will be over 49 billion connected devices, or about 6.5 devices per person.The internet has been growing at an incredible clip…but so has cybersecurity threats. The internet of things, mobile applications and other connected mediums have woven their way into our daily work lives and at-home routines. Criminals view this as an opportunity to subtly connect to your smart device in order to steal your personal or professional data; however, billions of dollars are getting put to work to prevent such an occurrence.Specifically, the security market is estimated to be an $88.8 billion dollar market by the end of 2016, according to Gartner – a public firm that specializes in IT research and advisory services. Executives are clearly demanding that their IT departments batten down the hatches and prepare for a more sophisticated battle. Other sources have the security market growing at a compounded annual growth rate of 9.8%.Despite the investments to thwart these criminals, C-Suite executives are still concerned. A recent survey from the NYSE indicated that 66% of surveyed board members are not confident that their companies are properly secured from cyber-attacks. In a separate report, conducted by Barkly Cybersecurity, 50% of information technology and security professionals surveyed were not confident in their respective efforts to protect their firms’ data.With all this concern, the future holds even greater capital flows into cybersecurity. Conservative estimates foresee the cybersecurity market being worth $101.6 billion by 2020. More aggressive...
Monetary Policy World Tour

Monetary Policy World Tour

Key Points:The Fed is preparing the U.S. market for an interest rate increase; odds favor one increase by the end of the year—specifically, the December meeting.Draghi and the ECB didn’t deliver on extending their asset purchase program but will if they have to.The BOJ “stands ready to use every possible policy tool” if necessary to achieve their policy objectives—especially key as they shift their strategy.Alpha can be found in any corner of the globe, but before capital can be put to work, the fundamentals must be taken into consideration. Nowadays, one of the biggest drivers of returns is central banks. Accordingly, below is what you need to know for each major central bank, from where they stand to what expectations are being priced in, as well as the effectiveness of their current policy as measured by economic activity and inflation.The Federal Reserve – USAAs expected, The Federal Reserve left interest rates unchanged in their September meeting. Fed Chair Yellen did, however, hint strongly at one hike by the end of the year, but slowness in numerous indicators dashed those plans for the September period. Prior to the announcement, rate hike odds were at 18%. For the next meeting, November 2nd, the market has rate hike odds at 7.2%. For the last meeting of the year, December 14th, the market is giving a significant edge to a hike. There is a 64.3% chance the benchmark rate is upped to 50-75 bps, 30.8% chance of being unchanged, and a very slim chance of 4.8% to the 75-100 bps range.Business fixed investment, inflation, and energy prices have kept a cap on inflation...
Edge in Selling Options Part 2: The Put-Write

Edge in Selling Options Part 2: The Put-Write

 Summary:Selling puts is normally characterized as dangerous; however, from 1986-2015, the strategy had the best risk-reward profile out of multiple strategies tested, as measured by standard deviation divided by total return.Modern managers leverage the put-write to benefit in multiple market scenarios: bullish, flat and even moderately bearish price moves.Short puts have risk down to zero, but the put-write strategy actually had one of the lowest max drawdowns during the period tested.$100 invested in the CBOE S&P 500 Put-Write Index strategy in 1986 would be worth just about $1,700 today, clocking in at 10.1% annual returns.A CBOE study recently concluded that despite the perceived risk of shorting puts, the strategy has performed incredibly well, even during the 2008 crash. Specifically, the study tested selling at the money puts on the SPX one month out and investing the secured cash in three month treasury bills. The only other strategy that beat the put-write was the buy-write (BXMD – long the S&P 500 index and each month shorting a 30 delta index call option). At a glance, the BXMD’s 10.7% annualized returns during the same period seems better, but when risk is taken into consideration, it’s not.Risk RewardTrades are not risk free. Every investment has risk to it. Standard deviation quantifies said risk. According to Morningstar, “if for example a fund or strategy had a mean annual return of 10% and a standard deviation of 2%, you would expect the return to be between 8% and 12% about 68% of the time, and between 6% and 14% about 95% of the time.” Risk is one side of the equation. On the other...