Where the Risk Lies in Oil & Bonds | Truth or Skepticism
Feb 19, 2016
By: Josh Fabian
This election year is proving unique. Candidates that historically would not be able to get enough supporters to fill a phone booth are blazing ahead of the pack. At least one of these candidates is proposing a transactional tax. Those who support a transactional tax fail to realize how such a tax ultimately supports the “too big to fail” system whose foundation rests on passive investing.
Enacting a transactional tax would increase trading costs, which could ultimately discourage active investing and drive even more money into passive investment firms. Travel down that road just a little and it is not difficult to understand Tom’s argument that a transactional tax will ultimately cause liquidity to dry up in the world’s most important market. Think markets are volatile now? Imagine them with 50% less liquidity.
The economies of the world are all continuing to struggle. Some central banks have begun policies of negative interest rates. In theory, charging interest on excess reserves should result in more money being put to use in an economy. Tom is skeptical of such a policy and questions not only the influence central banks truly have, but whether or not they are being “played” by financial institutions.
Intervention on the part of central banks, be it in the form of quantitative easing or negative interest rates, has resulted in what Dylan called “asset inflation.” Be it bonds or equities, the end result of Fed intervention resulted in overvalued prices. Returns on index funds during this period of intervention have given financial firms ammunition when arguing investors should passively invest their money.
Tom’s question is whether or not central bank policy has been the result of manipulation by the large firms who have benefitted most from intervention. The positive results from passive investing have made asset gathering that much easier. Continuing monetary policies that lead to asset inflation and proposing legislation to further discourage active investing is a path that keeps individual investors financially ignorant while supporting the very institutions whose actions helped create the financial mess we are still trying to clean.
As for markets themselves, Tom was nostalgic for option expiration of yesteryear. From his special shoes to the excitement expiration Friday once generated, today’s option expiration cycle is like having seen The Rolling Stones back in the 70s: young, hungry and full of energy (as well as other substances) then awaking from a coma and seeing them today...old.
The advent of weekly options has resulted in the excitement of that third Friday of every month being special. Once upon a time, expiration Friday could be counted on for a flurry of activity. Now those Fridays are nothing more than another day. Still, with options expiring today, many investors are facing the question of closing out losing positions or rolling them out to March.
At tastytrade, we’ve done our homework and extensively researched how to handle losing positions. Traditional finance suggests investors take their losses and move along. This becomes more arsenal for firms discouraging active investing.
Dylan, speaking on behalf of “his friend” who is short Tesla puts, asked Tom for his top picks right now and where the greatest risks remain. It’s a given Tom is short S&P and bond futures. In addition to that though, Tom is bullish on being short premium. Puts, calls or both, it doesn’t matter, with volatility as high as it is and a triple witching hour looming in March, Tom is selling premium while he can. March has a history of volatility collapsing anywhere from 4-7%, which means there may be a shrinking period of time for collecting premium.
As for risks, oil and bonds top Tom’s list. With oil currently trading near $31-$32, Tom sees greater risk in a move to the upside. Prices in oil are down from over $100/bl just 18 months ago. With oil being closer to zero than 100, and knowing oil will never reach zero, in Tom’s opinion, the risk is a run up in oil. Bonds have just the opposite risk. Interest rates on 30-year bonds are hovering around 2%. How much higher can bonds truly go? Probably not much. However, a move down could be a long move.
Josh Fabian has been trading futures and derivatives for more than 25 years.
For more on this topic see:
Truth Or Skepticism: Where the Risk Lies in Oil & Bonds: February 19, 2016
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.
Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.