Risk Free Arbitrage with Spread Betting - Page 2 @ Forex

Guide to Trading Future Calendar Spreads

Do you want to jump in trading futures but scared of the immense leverage they bring? Scared if you buy just one /CL contract at $60 and say Saudi Arabia tweets they're going to flood the oil market and suddenly /CL is trading at $30, meaning you've lost $30,000 overnight? Then you should check out Spread Trading!
Note: I originally wrote this two months ago as trading futures has a lot of idiosyncrasies I needed to absolutely cover for you guys. Thanks to beer-virus /CL really did drop from $60 to $30~ at the time I posted this. Spread trading would have drastically hedged your losses vs raw contracts.

What is Spread Trading?

Are you familiar with pairs trading in the equity world? The same idea exists in the futures world and it's the way to go. There are two types of spread trades:
The Calendar Spread - also known as a Intracommodity Spread. The trader goes long in one month contract and short in another month, both in the same commodity. For most commodities a bullish position is long in the closer month and short in the longer month. Bullish price action tends to increase prices in contracts that expire sooner than later on contracts.
One popular calendar trade is the "famed" natural gas (/NG) "widowmaker" spread - trading the March and April natural gas contracts. March is generally the end of winter weather while April is the start of summer. A bullish bet on natural gas will long march and short April, while a bearish bet will take the opposite trade. This spread has a "probablistic" floor of $0.00. If it goes negative it means March contracts is a lot cheaper than April and that would be very unusual. You can get in at say $0.05, risking $500 per contract, and if the spread up to $0.50 you'll have a position worth $5,000. In the past under severe winter weather the spread has shot up to $1.5 or $15k per contract or even more... Now, why is it called the Widowmaker? Imagine if you sold short the spread ; made the bearish bet...
The Intercommodity Spread - a trader goes long in one commodity and shorts a related commodity. Some popular examples are crude oil and heating oil, or corn and wheat. Taking corn and wheat, for example, wheat tends to trade higher than corn but most people will turn to corn products if the difference is too high. Suppose wheat got unreasonably high compared to corn. A trader could decide to short wheat and long corn, expecting the wheat price to drop faster relative to corn and making a "reversion to the mean" sort of play.

Why trade spreads?

It lowers your margin! It's generally safer and less volatile. (Shorting the natural gas widowmaker being an exception.) Let's use Natural Gas's Widowmaker as an example (/NG) as an example. The contracts have a +10,000 delta for march and a -10,000 delta for April, leaving a net delta of 0. This position uses very little margin but has wide swings and huge risk reward potential. It's almost like buying a call option with no theta burn and having to front very little money, as futures are marked to market daily. Your actual losses and gains come directly out of your futures account cash balance (or a margin loan if you have no cash balance.) You're free to invest your cash balance you receive each day if you're on the right end of the trade.
Note: for regulatory reasons while your brokerage shows your futures positions on your brokerage account it's a segregated account at a subsidiary of your broker. Meaning on Reg-T Margin trading futures comes out of "Option Buying Power" or is treated the same as withdrawing cash. Keep this in mind or you may have a surprise margin interest bill even though your broker's cash balance is showing positive say from options premium selling. Since it's a different account Box-Spread Financing or options premium selling can't be offset, so you have the possibility of having a debit margin balance unless you have actual cash for the futures themselves. Most brokers will auto sweep cash to your stock/margin account but TD Ameritrade is problematic and auto-sweeps sometimes don't happen. You can easily contact customer service and they'll sweep out the cash balance whenever you request.
Exchanges even lower margins for various Intercommodity spreads. Let's say wheat is getting some crazy price action due to a new fungus that's destroying wheat crops, while corn is remaining very stable, and you want to long wheat because of this. Just longing wheat will use a ton of margin. However, the future exchanges give you a 60% margin reduction credit if you short corn based on historical correlation. You free up some significant margin to put more on your trade. You still have downside protection if something unexpected happened to the grain market as a whole like the USA banning all grain products in food thanks to the success of the low carb keto diet.

Trading individual futures contracts contains hidden currency risk

Going long on just the underlying future contract is very deceptive. Going long on just /CL is not just a bullish bet on oil, it's a bullish bet on oil and a bearish bet (shorting) USD. Why is it shorting the almighty American Dollar? Well, what are the contracts priced in? USD! If the US dollar rises oil should drop in price as the whole world buys oil in other currencies and not just in USD.
By making a spread trade on /CL you cancel out USD and are purely betting long or short oil. Changes to USD are very likely to affect both contracts the same amount. To account for relative velocity between the expiration dates of the two contracts I'll add + sign, one for each month the nearer contract is ahead of the far contract. Here is a math example trade:
Bullish on oil, long the July contract and short the December contract. July Contract: +++++long oil, short USD December Contract: short oil, long USD Final Position: ++++long oil
You can see how short USD and long USD cancel out now. Need a easy way on how to remember trading raw contracts by themselves are a bet on USD? Just remember there are futures on euros and other currencies which are all denominated in USD.
Using my + method is a good way to think about the interaction between near and far dates as to the velocity and acceleration of price changes. Oil typically increases in price in summer months. Trading July vs August will be a small spread. If July increases in price then so will August. July is likely to increase faster as more people travel and drive in July in general in America than August but lots of people still travel in August and so it'll be a very small increase. July will increase much faster than December, with the far time away giving people who need oil in December time to acquire and wait for better prices, thus less price movement/action! Price increases need to sustain that long until December! This brings up one risk of spreads is seasonality risk.
Yes, as a rule of thumb generally a bullish beat is long the front and short a later month. However, there is seasonality to the trade. Long June and short July in oil will not behave this way, and in-fact is a bearish bet. This is known as seasonality risk. More people are expected to travel in July so with how oil behaves naturally it's more likely it'll spike harder and faster in the July contract than the June contract. It's of course not guaranteed - imagine if there is a shortage and suppliers can't even supply June. Best way of avoiding seasonality? Spread out your long and short bets across different seasons.
Going back to the Natural Gas example you can think of seasonality as longing a fall and shorting a winter contract will also tend to be a bearish bet, as winter contracts tend to increase a lot higher and faster than fall or summer contracts. Of course this isn't certain - have a early winter snowstorm in Fall before enough natural gas is stored is certainly going to spike fall natural gas contracts relative to winter contracts. This is another great example of seasonality risk.

Ok, trading spreads sounds great, but how do I actually trade spreads?

There are two options available: The spread market and the composite market. I'll break it down how it operates on Thinkorswim. Other platforms may vary.
First, I'll talk about the composite market. This is the simplest trade order but it's very risky. You have to execute two orders at the same time - such as a "blast all" order, and hope you get good fills. This is like legging into a call/put option spread trade - trying to long and short two different call options at two different strikes. You're trying to get in a good position. Unfortunately this may be your only choice, especially if it's a more advanced Intercommodity Spread you're trying to trade. You can chart the composite market simply in TOS by charting say this year's widowmaker spread by typing in: /NGH20-/NGJ20
Enter the spread market: Fortunately there are many popular spreads you don't need to leg in yourself! They have markets set up that take orders specifying the spread amount you want to buy and market makers will fill orders for you. The famed widowmaker has it's own spread market set up by the exchange. In the Desktop TOS app you can access it via the dropdown on the top of the quote screen changing "Spread: Single" to "Spread: Calendar." This will show you every spread market that is officially established on the exchanges. You can also do charting and buy on the spread market by typing in: =/NGH21-/NGJ21
The equals sign in-front of the two future products is VERY important. This is TOS's shortcut to chart and place orders on the spread market. All the price and volume shown here is what was traded on the spread market. Without the equals sign it's the composite market and the price/volume shown is just the sum of the price/volume of the two futures individually traded vs other traders explicitly trading spreads. Note: I don't know how other brokers let you make orders on the spread market. The equals sign may just be unique to TOS.
Special note for mobile users of Thinkorswim - for the longest time I was very frustrated with trying to trade calendar spreads on mobile. I used to set up large GTC orders from the desktop app that'd never get filled so I could adjust on mobile. I then learned about the damn equals sign and it's a hidden cheat code to unlock spread orders on mobile. Put in the damn equal sign and you can place mobile spread market orders with ease. There is no UI option to access spreads to trade futures on mobile on TOS.
If a spread market exists always trade the spread market. Don't risk trading the composite market.
Note for TOS mobile users - the home screen on mobile will always quote your home screen calendar position on the composite market which will lead to wild price displays. Don't freak out about this, you're most likely not losing thousands of dollars then gaining thousands of dollars over the manner of minutes. The desktop app properly quotes the spread market if it exists. This gives me a good idea to try out algorithmic trading and see if there is any arbitrage opportunities between composite and spread markets, but I bet it's there is huge competition there already.

Check out my other guides:

Box Spread Financing for extremely cheap 0.85% margin interest rates.
(now 0.50% APR due to interest rates dropping more lol.)
Portfolio Margin is 10x worse than 1R0NYMAN's box spread trick

TL;DR what strike/option/call/etc

This guide was about spreads trading... I guess /CL $30 strike future option calls, oh you gambler.
submitted by Adderalin to wallstreetbets [link] [comments]

[Part 2] KAVA Historical AMA Tracker! (Questions & Answers)

ATTN: These AMA questions are from Autumn 2019 - before the official launch of the Kava Mainnet, and it's fungible Kava Token.
These questions may no longer be relevant to the current Kava landscape, however, they do provide important historical background on the early origins of Kava Labs.
Please note, that there are several repeat questions/answers.

Q51:

How do you think about France in Kava market development plan?

What is your next plan to raise awareness among French about Kava?

Q52:

Why did you choose Cosmos instead of Aion, which comes with AVM built on JAVA, which can be accepted by many developers?

Will there be a possibility that one day we will be able to collateralize a privacy coin, such as Monero, on KAVA?

  • Answer: We like programming in GO, interfaces are OK for Java. Cosmos will also feature a WASM module and EVM later. The Cosmos-SDK is very flexible and it allowed us to choose our own security model. That was unique compared to other frameworks where we had to adopt the underlying blockchains. In Cosmos-SDK we can create our own blockchain.
  • Re: privacy - you can do some fun things in payment channels to make transactions more private. Such as onion routing clearing and settlement across different nodes. This can be possible in the future, but not our priority now.

Q53:

The biggest advantage of finance is the efficient allocation of resource allocation. If KAVA connects assets of multiple platforms through the interchain technology, the efficiency across the market will be improved.

But in terms of connectivity, Facebook's Libra, with its centralized giant platform, could be a big threat for the future. Of course, regulatory uncertainty still exists. KAVA wonders what big platform companies think about entering the blockchain field and how they can cope with their competition.

  • Answer: We think of Kava as a DeFi service that can integrate with wallets, exchanges, and other platforms when users want loans or stable coins for payments. We don't see competition with Libra, but we see lots of users potentially getting into crypto which will be good for the market, good for BTC, and good for Kava.

Q54:

What will you do with the money after IEO?

What is the most important markets that Kava is focusing?

What is your marketing strategy to approach those markets?

  • Answer: What will we do with the IEO money? Put it in a bank and keep building. We keep our funds safe in secure accounts that are insured. We always maintain at least 2 years runway in pure fiat to ensure we can survive in any bear market conditions and come out on top in the end.

Q55:

On mainnet, which function/feature can we expect to see on Kava since i only saw informations about its testnet?

  • Answer: mainnet will feature KAVA, staking, delegating, validator software, voting and governance / parameter changes. Following mainnet, the validators will vote to enable transactions and the CDP platform. We expect this to be towards the end of the yeaQ1 2020

Q56:

How does Kava maintain the stability of its stablecoin? Are there any opportunties for outsiders to arbitrage or any other mechanisms to maintain price stabilization?

  • Answer: Kava users deposit crypto assets as collateral and can withdraw a loan based on the amount they deposited. They must always provide more collateral than the loan is worth. When the value of the collateral drops due to market conditions, before it reaches the value of the loaned amount, the platform will auction off the crypto assets for USDX that is on the market at a discount. Holders of USDX can buy these assets at a profit. This removes USDX from the market and makes sure that the global USDX to collateral in the system remains balanced. Similar to MakerDao, 3rd parties can run "keepers" - very simple implementations which continuously monitors the Kava/USDX credit system for unsafe CDPs, and execute the liquidation function the moment they become unsafe. Keepers can also perform arbitrage on DEX/Exchanges executing trades across the Kava platform and the markets.

Q57:

Alright! So KAVA is doing DeFi right, could you explain DeFi in layman term to us.

  • Answer: Decentralized Finance. Finance is really ensuring everything about past, present, and future value of money. You need safe custody and a store of value to keep money you earned in the past safe to be used later when you need it. You need something liquid and easily tradable to be used in the present. And the trickier one is the future - people need to get loans on the assets they have or hedge against the assets they have in order to ensure they can build for a better future. That’s finance.
  • DeFi is taking all those things and making them open access and unregulated so that regardless if you were born with out an ID, if your credit score is bad, or if the government is trying to censor your actions and limit your spending - DeFi promises to give you a way to get access to the financial products you need.

Q58:

Could you please briefly explain your projects, and why you choose DeFi as a problem to solve?

  • Answer: Kava is a cross-chain DeFi platform for cryptocurrencies. Kava offers decentralized loans and stable coins for any other crypto asset such as BTC, XRP, BNB, and ATOM.
  • DeFi is the killer use case of crypto today. I think most people see this clearly now. We believe providing the basic DeFi services is the very first step that is required before blockchain technology can really become wide spread - so we started here.

Q59:

Why the name of the project KAVA?

  • Answer: We started in crypto thinking we would build banking products and we wanted a more relaxed cool name to stand out from other solutions. Turns out Kava means many things.
  • Kava = Hippopotamus in Japanese
  • Kava = crow in hindi
  • Cava = wine region in spain
  • Kava = a medicinal root you add to Tea
  • Kava = now a cross-chain DeFi platform
  • But TLDR - we liked the name and thought it sounded short and sweet.

Q60:

What do you think of the future of DeFi in this space? Will DeFi one day take over the traditional financial systems? -- any wild guess on when it might happen?

  • Answer: I think centralized solutions will always have certain advantages and DeFi will also have certain advantages.
  • But truthfully, KYC is a problem from a user experience point of view. One of the big things with DeFi is there is no need to make people go through a KYC process anymore.
  • If we imagine a world where USD Is king, or Renminbi is king, or BTC is king. DeFi has a place in all of them because open access to financial services is a basic human necessity.

Q61:

As we have known, Lending is not the only problem to solve in the whole financial areas, are you planning on going beyond lending? What other financial products are in your pipeline?

  • Answer: Thats a good #Q .
  • While we have a lot to solve to offer lending to other crypto assets - we can expand our support to non-crypto assets, to NFT tokens, and other assets.
  • We also have plans to offer derivatives and other synthetics other than USDX - such as synthetic bitcoin and Yuan. What is exciting about Kava and the oracle system run by validators is that we can leverage this infrastructure around the world to do all sort of things.
  • One of the more interesting products is creating under-collateralized loans using payment channel (layer-2 tech) of our USDX coin. Two parties can lock funds in payment channels and place bets on the price feeds from the oracles. When the funds reach a maximum threshold, the bet closes. Since a price feed is just a data set, we can have the settlement rules be multiples of the real data. In simple terms we can create 100x leverage products for the craziest of traders 😉

Q62:

Btw KAVA is a bit unique because it use Cosmos/Tendermint. While other DeFi use Ethereum , why you guys choose Cosmos?

  • Answer: Cosmos is the future. Even facebook’s Libra consensus design was just a copy of Tendermint. Kava, Binance, the Cosmos Hub and many other blockchains are built on the same Cosmos-SDK framework.
  • It’s very flexible and soon interoperable. This is a huge advantage over Ethereum. Where system’s like MakerDAO will be forced to develop in a slowly evolving chain like Ethereum and only touching Erc20 assets, Kava will be able to rapidly evolve, program in GO rather than solidity, and interoperate with chains like Binance directly.
  • We’re very excited to get BNB and BTCB onto Kava’s CDPs and to put KAVA and USDX onto the Binance DEX. This is fairly easy on Cosmos.

Q63:

I saw in KAVA deck that you guys will use USDX, is it a stable coin? How is it going to work and its relationship with KAVA token itself?

  • Answer: USDX is an algorithmically stable token pegged to the USD. USDX is the token users recieve when they get a loan from the Kava platform. USDX is collateralized or backed by crypto assets so the Kava platform should always hold more crypto value than the USDX it loans making USDX a very safe store of value even if the market crashes 10x overnight. That is what a stable coin should do.
  • USDX is special though. Natively, users can spend or trade USDX freely like other stable coins, but the important difference is that 1) USDX is free of censorship and does not require a bank or anything else. 2) USDX can be “bonded” or “staked” providing an interest bearing yield between 2-10% APR. This is substantially more than what I can even get from my bank account.

Q64:

From your point of view as KAVA team, what would be most anticipated feature in KAVA ?

  • Answer: Our CDP platform launch later this year. The first USDX will be minted then.
  • Support of BTC in the CDP smart contracts. No blockchain has supported a real decentralized custody and use of BTC with smart contracts before.

Q65:

Indonesia is one of the “developing” countries, how is DeFi can help in making a difference in those “developing” countries?

  • Answer: I can’t speak for developing countries as it’s not my expertise, but DeFi in general is trying to offer the exact same services to EVERYONE. Whether you are in San Francisco or Indonesia, the financial services you should have should be similar. The rates and fees you pay should be the same. DeFi is fair treatment and open access for everyone. That is what’s nice about having things run on a protocol.

Q66:

Last but no least, since we are doing AMA in Indonesian group, I believed our members wants to know if you are interested in going to Indonesia to expand your community and reach?

  • Answer: As I said, I have not been before! I am traveling throughout South East Asia for a lot of the year. It is one of my destinations. I hope to meet many of you while I am out there.

Q67:

Defi companies are growing at a rapid pace, but they're actually smaller than traditional financial institutions. In order for Defy to become a global trend, it must eventually acquire consumers within the traditional financial industry.

Traditional financial consumers, however, have poor technical understanding and want psychological stability through government guarantees such as deposit insurance. After all, what does KAVA think about long-term competitors as traditional financial institutions, and what long-term strategies do they have to embrace traditional financial consumers?

  • Answer: We think of financial institutions as big honey pots of potential DeFi users. For example, if Kava can offer margin lending at better rates than a bank because there is no middle men or compliance costs, users should want to use that service.
  • As crypto grows, I believe more FIs will integrate crypto assets and DeFi services. For example, in the US you cannot currently margin trade crypto as a retail user. But it could be possible for a regulated FI to integrate a lending service like KAVA without causing issues with regulators due to Kava having no counter party risk other than the user itself.

Q68:

MakerDAO is only for ethereum but Kava support multiple assets, is this only difference?

What are Kava main advantages compared to MakerDAO?

  • Answer: Kava supports multiple assets THAT are on different blockchains. Maker can only support ETH. This is a huge difference. In addtion, the role of Maker is quite likely a security token. It represents fees paid by others. Where in Kava, the token is used in security of the blockchain protocol itself. The holders of Kava have a lot at stake and need it to govern the system. Maker holders have nothing at stake.
  • I think a huge difference is that with our model being POS and based on validators with slashing if they don't participate our governance participation and management will be much more effective than MakerDao.

Q69:

Ticket claim for KAVA Launchpad is comming around the corner. This maybe last IEO ticket claim of this year. With this hype and expectation of investors/traders, do you think KAVA will be a big boom to end this year with happy tears?

If someone wants to manipulate Governance function of KAVA by changing voting result by possessing many Validators Node through buying over 51% KAVA of market, what will KAVA team do? Do you think Emergency Shutdown(Maker has this) can be considerd as a solution?

How will USDX be minted and backed on KAVA platform? If its based on uses crypto collateral, how will KAVA team make it stable since the inflation of crypto price?

  • Answer: I believe Kava to be underpriced currently, especially compared to maker which is 10x the value and serving ETH which is much smaller market than ours.
  • But I cannot tell you with certain if Kava will boom or bust - only the market can decide that. As with all speculative assets, do your homework and trade at your own risk. We here at kava are very LONG Kava, but we are biased 😉

Q70:

Stablecoin is the word that I heard everyday, so do you have any plans to release wallet for stablecoin?

  • Answer: There are already wallets created for Kava that can hold our tokens 😉

Q71:

My first question is: Why do traders choose to use KAVA instead of margin on exchanges?

My second #Q is: What happens whenKAVA doesn't have enough cash to loan out?

  • Answer: Traders who cannot get passed KYC can use Kava. Traders who want better rates than exchanges can use Kava. If regulators like in the US prevent margin trading, Kava is a great solution.
  • Kava creates USDX out of thin air when users withdraw loans. It will only create Kava is the user locks a great value of crypto in the system to back it. When the USDX loan is repaid, it is destroyed. In this way, Kava can scale however big it wants - it will never run out of cash.

Q72:

i heard as you said before in San Fransisco, Silicon Valley. what is the relationship about Silicon Valley and KAVA? and what will KAVA done in this Q1 ?

  • Answer: I am born and raised in Silicon Valley. I am blessed to have grown up in this area where lots of tech innovation is. However, I am the only one at Kava that lives here full time. The others on my team are in the Cayman Islands and Cambridge.
  • San Francisco is a hub for the largest crypto projects - Ripple, Coinbase, Stellar, etc. It's a great place to network with founders and feel inspired to do big things. It is not the best weather here, but the people are focused and extremely helpful if they can be if you aim to do big things.

Q73:

With regard to minting new USDX, is there any potential chance to against Global financial law? Likewise USDT, issuing money should guarantee deposit of real collateral as I have known.

  • Answer: USDX is debt. It is not a guarantee, but the protocol's rules state it must have more crypto assets behind it than the # of USDX issued. In this way, rules are better than guarantees. Tether guaranteed 1:1 USD, it turned out not to be true because their funds were seized by regulators. That is impossible in the case of Kava.

Q74:

What is the uniqueness of KAVA project that cannot be found in other project that´s been released before?

  • Answer: Cross-chain is unique for us. But most unique is our partners and validator group that is launching our blockchain. We have incredible partners that support our work including Ripple, Cosmos, Arrington, Hashkey, SNZ, Lemniscap, etc.

Q75:

KAVA was initially planned to launch on Ripple network but later switched to Cosmos Tindermint Core. What is that something you see in Tindermint Core that is not available anywhere.

  • Answer: We did not plan to launch on ripple and did not launch on "Tinder"-mint. I have a fiance - she would be quite mad.
  • We did however use the Cosmos SDK - a tool set, to build our blockchain that features tendermint consensus.
  • Tendermint is just the consensus so I assume you mean the SDK. The SDK is very much "choose your own adventure" you can build anything and design all the spec of your blockchain easily. In this way you choose the tradeoffs that make the most sense for your special application/network

Q76:

How much portion of USDX is backed from crypto/fiat money ...& please mention why any trader, hodler will prefer USDX over other stable coins?

What are the biggest challenges you expect to face and how do you plan to overcome these challenges?

  • Answer: 150% of USDX or more is backed by crypto. Traders will use USDX because it offers a savings rate. This rate allows traders heding bitcoin or other assets to not only store value, but earn a return.

Q77:

What do you think about creating liquidity for the Kava project?

  • Answer: It's the biggest challenge. My hope is the savings rate USDX offers will give it natural organic demand over existing stable coins. It will definitely be a large BD process to get USDX listed and used worldwide.
  • We work with some of the worlds best market makers to seed liquidity today. But we will need organic demand in the long-term

Q78:

So many IEO projects consistently drop in price after listing. Whats different with KAVA, what are some special highlights?

  • Answer: Why is Kava based on Cosmos? Based on what considerations?

Q79:

How do you see the chinese language community? How do you view the opportunities for growth in the chinese community?

  • Answer: You will be soon listing on Binance, what are your plans on the business side after listing? In one years time, what are your thoughts on where Kava's development will be?

Q80:

If we take a look at all the different types of DeFi products/apps out there, including decentralized exchanges, stablecoins, atomic swaps, insurance products, lending platforms, trade financing platforms, custodial platforms, crowd investment platforms, etc, nearly cover all the important areas of traditional finance.

In this age of all these different platforms taking hold, where does Kava see itself appealing to its app developers, users, investors?

  • Answer: What does Kava do? What can a normal user (of crypto) achieve by using KAVA?

Q81:

How does Kava maintain the stability of its stablecoin? Are there any opportunities for outsiders to arbitrage or any other mechanisms to maintain price stabilization

  • Answer: What is the reason for the IEO price reaching 6x the first round private sale price? How did you come about to reaching this valuation?

Q82:

What would you be able to do more for Russian-speaking communities and regions?

  • Answer: one thing to keep in mind is that yes, we do have limitations and regulations to follow when it comes to certain countries and we will adhere to those regulations in hopes of proving ourselves to be a thoughtful and long-term solution. while we may not directly work with some countries, we hope that communities there can understand that we're here focused on being sustainable rather than another project around shorter-term gains.
  • for myself, I'm actually belarusian myself so I absolutely see the value of working in the CIS/Russian-speaking regions. we'll continue to do AMAs, interviews, and always engage with Russian-speaking communities to better understand what the #Q s, concerns, and thoughts.
  • If there's anything else we can do in this region and with the @gagarin_ico communities, please let us know!

Q83:

What are your major goals to archive in the next 3-4 years? Where can we KAVA ecosystem in this period? What are your plans to expand and gain more adoption?

Do you guys feel satisfied by seeing your progresses and achievements till now, when you look back to the day when you have started this project?

  • Answer: We want to really build out great DeFi products for the masses. I really believe that DeFi will be a major force to allow much more mass adoption for crypto over the coming years. In the sorter term, we want to push out our blockchain and build on top of that our CDP platform, which allows users to trustlessly put collateral onto the Kava blockchain, and receive a loan in USDX that will be also trustlessly administered.
  • We will then build out more complex products and financial derivatives for crypto users and traders. We have barely scratched the surface in what we can do with DeFi so I can't predict the future, but we want to build products that are pegged to BTC values so that traders have more leverage purely in crypto.

Q84:

Which one of your milestone do you think was difficult and which was the encouragement that courages you to achieve it?

What were the Minimum and Maximum limit of KAVA tokens that one can be able to STAKE after the Mainnet launch ? And What will be the percentage of reward one gets and will it in future ?

  • Answer: Good #Q ! Well we've been working on open source cross-chain technologies for a number of years and honestly it can be a pain. I think the Cosmos SDK made it significantly easier to implement the features that we wanted into the software.
  • I think the largest challenges for Kava are not software based but in market adoption. Makerdao is a great project and they have spearheaded a lot of the work in the lending field. Hopefully Kava can be a very meaningful contributor as well

Q85:

What if someone fails to repay the debt? Is that KAVA is taking collateral system to enterprise level & if so, what's the plan? How secure KAVA is to safely handle the collateral tokens?

  • Answer: These CDPs or "collateral debt positions" are always over-collateralized, which means you have to have more asset locked up in the bucket than you can draw from the bucket. The system leaves a margin when the collateral is 'called' to be able to sell off. If the asset cannot be fully redeemed KAVA is minted to cover the balance. Hence KAVA is a 'lender of last resort". This is why its important that we select good initially assets to support 👍

Q86:

I am very impressed with your voting method, how does it work? Whether users can vote to change things in the platform, are you a programmer with filters to decide what can be voted on and what is not possible?

  • Answer: Thanks. A lot of this was pioneered with the Tendermint team. Basically voting is entirely open and asynchronous, meaning anyone can submit a proposal to be voted on. All the project in the Cosmos ecosystem are working diligently to expand the space of variable or features that can be modified via this governance method in protocol. For example, we were the first to enable transactions directly via governance in our Testnet-2000!

Q87:

Where does the interest rate come from for holding USDX specifically & technically?

  • Answer: Great #Q ! Just like in MakerDAO, lenders of collateral (e.g. BTC, BNB) pay an annual interest rate to borrow USDX. A portion of that interest rate accretes to holders of KAVA, the rest we can apply a 'carrot' for users to adopt USDX. In short, Savings rate is loan interest rate less 'rents' collected from KAVA holders

Q88:

As far as I understand it KaVa is used both as a staking token and as collateral for Kava stablecoins (UsDX) .Can you talk a bit about the stability mechanism? Can other forms of collateral be used to create Kava stablecoins (a la Multi-Collateral Dai)?

  • Answer: KAVA will not be used as a collateral type in the CDPs. Collateral types will be assets exogenous to the system, like BTC and BNB. Of course BTC and BNB's value fluctuates. To make USDX not fluctate we ensure there is always more BTC or BNB in the CDP bucket than 'stable' USDX. Therefore BTC could increase or decrease a lot, as long as its less than the 'stable' debt of USDX that you have drawn, the system is healthy and functional 👌

Q89:

As far as I know, KAVA had 150 Validators in the test. Why do you have so much. Which conditions are your team based on to choose / invite them to stay decentralized, important for a Defi platform like KAVA?

  • Answer: KAVA mainnet will launch with a cap of 100 validators. We want as many validators as possible. The reason? What if KAVA was run by just you and me. Well that works if people trust us, but its pretty for us to collude and act maliciously. Its harder for 100 people to collude -- its still possible, but harder. And so we put a lot of effort in to promoting a healthy and large validator community, and empowering them to grow their stake in the system

Q90:

As a developer, which program languages can i use in kava core smart contracts?

2How secure your fully on-chain liquidity protocol & What's is a core Smart Contract ?can you briefly explain.

  • Answer: Yay developers! 🤓 The Cosmos SDK is currently written in Golang. So thats a good start. What other language would you like to work in?

Q91:

What do you think of DEFI in the Blockchain space?

DeFi brings many benefits to users, but conflicts of interests with the Bank. What is the solution of kava?

  • Answer: Defi to me is offering financial primates, the supplies of which are spreadout amongst many participants, as opposed to few. People offer loans on BTC today. Kava's goal is to maximize the amount of counterparties to any loan, thereby 'socializing' the returns on any activiely used financial product

Q92:

What is the crucial thing, in your opinion,that would increase adoption of KAVA and possibly the rest of crypto. What’s the KAVA economic model and how will it is architecture ensure scarcity of the token and help to growth token price?

Can you tell me more about the new technology that combines the benefits and interactive functions of Cosmos with the DeFi applications you have built?

  • Answer: Principly what I believe is 'new' about the KAVA tech stack is that we are building a standalone piece of software that treats other network techologies as 'first class citizens'. This means from the ground up our design is mean to easily incorporate and work with other software. A lot of blockchain is a story of "everyone will use my software, because its the best". Kava Labs worked for years against this view while bringing open Interledger to market.

Q93:

As Per Kava website ! $KAVA was done many partnerships with Big project like Ripple, Cosmos, TenderMint, Hashkey, etc ! So, whats the major reason and benefits of these partnerships to kava project?

Kava Project have their own Mainnet Blockchain So, whats the main work of Cosmos Blockchain in Kava ? Is Kava projects is on Both mainnet and Cosmos OR Kava is just using the Cosmos Blockchain services?

  • Answer: Working together. Pooling resources and talent to make something bigger! Crypto is still a little fish in a huge ocean of financial services. Kava Labs has always had an eye for inclusivity. Grow the pie!

Q94:

I have been too involved in KAVA's AMA, I think I know all about your technology.I want to ask a successful person like you why come with cryptocurrencies and blockchain, with talent. There are many other areas for you to choose, so why are you targeting such a risky market?

  • Answer: Successful ay? hehe. Depends how you define success and what your goals are. I love delivering products to users. Crypto has some fantastic users, and there is still sooo much to be built. I think KAVA has a lot of promise, but there is still so much work to be done and I hope users like you all become producers some day as well

Q95:

What's the most critical and innovative point of KAVA to ensure users that it is the best under DeFi niche?

How can you compete MakerDAO which has done good number of business with recent market! If I hold KAVA tokens how KAVA leverage the tokens value and make it moon for me? 🙈

  • Answer: "IF" you hold KAVA tokens now? 😂 Again I think this a markets concern. To the extend that users on other chains begin to trust KAVA brand for loan issuance, and we get some solid adoption of USDX I think we're in a good spot. I would say a benefit of KAVA is that we are FOCUSED. We're not trying to be everything for everyone. This is lending, quite simply, for the large market cap coins -- and that's hard enough

Q96:

Why KAVA needs to create it's own stable coin, whereas there are are many other options available in the market? Is that crypto tokens can be stable!!?

  • Answer: Yeah there are a lot of USD backed stable coins that is true. Indeed we have looked around with working together with a number of them. The difference with USDX (and DAI) is that its crypto-collateral backed. Doesnt mean we won't work with others in the future 😉

Q97:

Processing fees on loans we need to pay in kava or usdx?

Which types of success you've been seen in testnet? Why on Nov 5th you've planned to launch mainnet? How many testnet was processed in the past?

  • Answer: Three major testnets with some minor iterations therein. Testnet-3000's software was pinned to KAVA mainnet software. That testnet is looking good which is a good indicator for smooth sailing on mainnet launch, we'll see 🤞

Q98:

DeFi is a hot niche when it comes to crypto/blockchain project! Most of the projects are developing aiming DeFi, How KAVA is looking to contribute in DeFi ecosystem? What will be the approach of KAVA to systemize & increase adoptability?

  • Answer: DeFi is big. Mostly on Ethereum, which is great! KAVA is for non-ethereum networks 😇

Q99:

What is the main reason that you think that Cosmos-based Kava zone will present a new validator opportunity :- a complex and multi-faceted governance system that allows differentiation?

  • Answer: Validator #Q , nice. I believe its important for validators to be able to distiguish there service in multiple ways, not just on security (otherwise they will be treated as a commodity). KAVA present an opportunity for validators to distiguish themselves on the basis of proper governance of system parameters on behalf of their delegating constituents. KAVA is a "lender of last resort", so delegating to a sophisticated validator could lead to better results beyond security.

Q100:

How is kavas tendermint better than other defi consensus especially with the introduction of etheruem 2.0 which many believe will be better than all others - considering kavas association with ripple, is it possible to foresee defi loans from crypto to fiat ?

Maybe kava partnership with centralised banks?

  • Answer: IDK about that. But we will be working closely with the great folks over at Ripple, thats for sure!

Q101:

Adoption is one of the important factor that all sustainable blockchain projects should focus to be more attractive in the invertors' eyes.

Can you tell me what KAVA has done and plan to do to achieve Adoption in the reality, real use cases, our real society?

  • Answer: Bitcoin is real!? I'm continuously impressed by the demand and size of that network. Help us capture that demand! Really, if we can I think the future looks bright for KAVA!
submitted by Kava_Mod to KavaUSDX [link] [comments]

[D] CSGO Newbie Investing Guide (2019)


This is the first iteration of a new Newbie Guide to Investing in CSGO, covering most basic issues. Some subjects are in the work and will be added at a later date.

Before we start, THIS is a fantastic overview of CSGO Market History (until April 2019) and a must-have, including timeframes for regular and operation drops, many important events and lots of useful info, made by steamfrag

Which items can be invested in?


Introductionary Note: Discontinued consumables (cases, stickers and basically all containers) are better items for long term investment than non-consumables, since consumables get deleted from the market when used, thus reducing their quantity over time, unlike skins which are only deleted if a user gets banned or if the skins are used in trade-up contracts. Specific skins/knives/gloves could be profitable to invest and to hold long term, if you know exactly what you are doing. But generally skins are better suited for frequent trading and not long term investing, or if you want skins to play with and more or less hold their value with some potential to go up in price. As an example, Here is a video from TDM HeyJesus from last year explaining what I mean. If you are more interested in trading with others, nice knives and gloves, etc. and not mid/long term investing, visit /GlobalOffensiveTrade


List of all CSGO Cases in Chronological Order:

Case Name Release Date Rare or Active Drop
CSGO Weapon Case 14. August 2013 Confirmed Rare
eSports 2013 Case 14. August 2013 Confirmed Rare
Operation Bravo Case 19. September 2013 Confirmed Rare
CSGO Weapon Case 2 08. November 2013 Confirmed Rare
eSports 2013 Winter Case 18. December 2013 Confirmed Rare
Winter Offensive Weapon Case 18. December 2013 Confirmed Rare
CSGO Weapon Case 3 12. February 2014 Confirmed Rare
Operation Phoenix Weapon Case 20. February 2014 Confirmed Rare
Huntsman Weapon Case 01. May 2014 Confirmed Rare
Operation Breakout Weapon Case 01. July 2014 Confirmed Rare
eSports 2014 Summer Case 10. July 2014 Confirmed Rare
Operation Vanguard Weapon Case 11. November 2014 Confirmed Rare
Chroma Case 08. January 2015 Confirmed Rare
Chroma 2 Case 15. April 2015 Confirmed Rare
Falchion Case 26. May 2015 Confirmed Rare
Shadow Case 17. September 2015 Confirmed Rare
Revolver Case 08. December 2015 Confirmed Rare
Operation Wildfire Case 17. February 2016 Confirmed Rare
Chroma 3 Case 20. April 2016 Confirmed Rare
Gamma Case 15. June 2016 Confirmed Rare
Gamma 2 Case 18. August 2016 Confirmed Rare
Glove Case 28. November 2016 Confirmed Rare
Spectrum Case 15. March 2017 Confirmed Rare
Operation Hydra Case 23. May 2017 Confirmed Rare
Spectrum 2 Case 14. September 2017 Active
Clutch Case 15. February 2018 Active
Horizon Case 02. August 2018 Possibly Rare (needs more data)
Danger Zone Case 06. December 2018 Active
Prisma Case 13. March 2019 Active
CS20 Case 18. October 2019 Active
Shattered Web Case 19. November 2019 Active









  1. The Cache Collection
  2. The Chop Shop Collection
  3. The Cobblestone Collection
  4. The Gods and Monsters Collection
  5. The Overpass Collection
  6. The Rising Sun Collection



  1. The Assault Collection
  2. The Aztec Collection
  3. The Baggage Collection
  4. The Dust Collection
  5. The Inferno Collection (The Old One)
  6. The Militia Collection
  7. The Mirage Collection
  8. The Nuke Collection (The Old One)
  9. The Office Collection
  10. The Vertigo Collection


  1. The 2018 Inferno Collection
  2. The 2018 Nuke Collection
  3. The Bank Collection
  4. The Dust 2 Collection
  5. The Italy Collection
  6. The Lake Collection
  7. The Safehouse Collection
  8. The Train Collection






  1. M4A4 Howl (removed due to copyright violation) - The only Contraband item in CSGO
  2. Dual Berettas Retribution (removed due to artist ban)
  3. P90 Desert Warfare (removed due to artist ban)
  4. CZ75-Auto Poison Dart (removed due to artist ban)
  5. MAC-10 Curse (removed due to artist ban)
  6. USP-S Orion (removed due to artist ban)
Note: Some skins were banned from a case, but can be traded up to with trade-up contracts


  1. Sticker Howling Dawn (removed due to copyright violation)
  2. Sticker King on the Field (removed due to artist ban)
  3. Sticker Winged Defuser (removed due to artist ban)
  4. Sticker Harp of War (Holo) (removed due to artist ban)



Other ways to profit on the market than long/mid term investing












FAQ


How many items can I hold in my inventory?
Officially, 1000. You can list excess items on the steam market (for high unrealistic prices) and basically use the steam market as extra space. Note that the price of your listed items on market + your steam wallet cannot exceed $2000 at any given time. You can increase the number of items in your inventory and the amount of steam wallet money through some tricks. It is however recommanded that instead you simply make extra accounts and prepare them for usage as extra space and as storage accounts, if you need more space.

How much is the Tax/Fee on Steam Community Market?
Approx. 13%-15% total for most.
Here is one in Euro by donbernie and Here is one for items under $1 by HwanZike
Yes, if you want to make Gaben really happy, sell for 3 cents and give him 2

What are some real-money marketplaces for CSGO items?
Use all external sites at your own risk

I've personally used skinbaron and skinbay and had no problems so far. There are others out there like cs deals. Update (Oct 2019): I used Bitskins before they changed ownership in Oct. 2019. I am waiting to see who the new owners are (still unknown) and how the site develops, before using them again.
Also note that the most popular one, OPSkins was BANNED by Valve in 2018. Do not use OPSkins if you want to cash out from or cash in to Steam anymore. Their so called VGO Skins aren't actual CSGO skins, even though they look similar. Update (Oct. 2019): OPSkins apparently made a comeback with a P2P system without using Bots. Proceed with caution, because Valve basically sent them a cease and desist letter in the past letting them know that they aren't allowed to be associated with CSGO and use any intellectual property of Valve on their websites at all anymore.

What is the most efficient way to cash out?
Sell the items directly at Bitskins, Skinbaron or another trustworthy site. Depending on the items, this can take a while. As an alternative you can exchange your investments into liquid items (popular skins for frequently used weapons, certain knives, case keys, sticker keys, nametags etc. - spend some time to determine which item gives you the best rate) and sell those liquid items on external cashout sites. The latter method will increase the speed at which you get money but will lose you a larger percentage. Keep in mind that BitSkins/Skinbaron take a percentage (5% to 15%), Paypal takes a percentage (~2%), and that the item values on external sites (real money value) are always lower than in the Steam Community Market. Also, every transaction on the Steam Community Market takes away 15% already. Occasionally the items on external sites are so cheap compared to SCM that it becomes worth it to sell them on SCM instead, buy keys from the in-game store, and then sell those keys on external sites again. When selling on SCM it almost always is correct to sell with an order that's higher than the highest buy order and higher than the lowest sell order if the lowest sell order is lower than recent trends display.

What is the most efficient way to buy in?
Buy items (not necessarily CSGO only) from trustworthy external cashout sites or from highly reputable sellers with high cash rep if they offer a better deal (you can find some on /GlobalOffensiveTrade) and sell the items on the Steam Community Market. Spend some time to determine which item gives you the best discount compared to Steam Market Price. Be aware that some items such as souvenir skins, certain Stattrak knives, etc. might have a very high discount, but are very very hard to resell back on steam market, avoid these items and stick to popular items. There is a reason why they have such a high discount. Also be aware that some items might be manipulated on steam market, thus showing a very high discount on 3rd party sites when compared, avoid these items and check their market history to be sure. http://csgo.steamanalyst.com/hotdeals is one of the tools that can help you with good deals, or the deals section at BitSkins. The general rule is also the cheaper the items, the higher the possible discount. For instance you could buy very cheap stickers for sometimes 50% off, and resell on steam market. But the downside is that it takes a lot of time and effort than a single expensive item, but gives you more steam wallet money at the end. Make sure that after steam tax, you always get more money than if you deposit the money directly to Steam, otherwise this whole process becomes completely pointless.

What are the case opening odds?

Normal StatTrak
Knives and Gloves 0.26% 0.026%
Covert 0.64% 0.064%
Classified 3.20% 0.32%
Restricted 15.98% 1.598%
Mil-Spec 79.92% 7.992%

Why did item X increase/decrease in price?
Possible reasons: CS:GO updates/balance changes/game changes/market changes (e.g., Tradeup Contract), new cases/operations (both short-term, due to opening frenzies, and long-term, due to increased supplies of skins), a famous streameyoutuber hypes an item, someone tries to manipulate the market, a AAA game is released, a tournament is taking place (CS:GO, DOta 2 etc.), a Steam-sale like Summer sale is going on, a market-bug is ongoing, the ingame drop rate was increased/decreased, legal issues about things related to the CSGO market (e.g., betting/gambling), etc.

If I create a new Steam account, how do I transfer items to that account? How long does this take?
Create a new account, log in (via the thick client), set up your profile, enable Steam Guard, wait 15 days, and transfer the items to the account from your main (double check that it is your account). If you intend to use the thin client (e.g., via Chrome), make sure that you log in from there as well because Steam will impose a 7 day trade restriction on your account when you attempt to create a new transaction from a new device (a device meaning a new browser). Also, if you do not have mobile authentication enabled on the alt account, there will be a 3 day delay for trades. You can use the same phone number & email address for many Steam accounts. Also, Gmail forwards emails addressed to your account even if dots (.) are added in between the username characters of your email address.

If I create a new Steam account, how do I use the Community Market? How long does this take?
Same steps as above, but you need to purchase a game that costs at least $5 or deposit $5 into your Steam wallet (and wait a month) before being able to use the Community Market. Keep in mind that using a new payment method will trigger a weeklong community market cooldown on your account.

After buying a CSGO item from the Steam Community Market, how long do I have to wait until I can sell/trade it?
They are sellable immediately on the Market. You need to wait 7 days until you can trade them to another account. Note that items from some other games, have the 7 days cool down both for trading AND steam market (like Rust).

How do buy orders work?
When you place a buy order, the market first looks for all the cheapest items that can fulfill your order. Then the oldest listing (i.e. the seller who has waited the longest) is selected and purchased. If the items are listed in multiple currencies, the amounts are first converted into your currency before being selected (i.e. a 0.03 RUB listing has no priority over a 0.03 USD listing). If multiple buy orders satisfy a new market listing, the oldest matching buy order will be selected. It used to be different in the past, but was changed in 2017.

How do I create multiple listings at once on Steam Market?
You could use one the addons listed in the "useful sites and tools" section of this guide down below. The current most secure way (since no external extensions are used) is a solution suggested by u/soldture . Simply copy this link: https://steamcommunity.com/market/multisell?appid=730&contextid=2&items[]=Falchion%20Case
Change Falchion%20Case to your desired item name. This solution only works with commodity items. This also works with other games (you have to change the appid and replace it with the appid of that game, for instance Rust is 440.

Item X hyped and is going to moon. Should I Buy?
Usually parabolic moves are followed by a crash (not always but most of the time). It is almost never a good idea to buy when something is mooning because of a video, some news, manipulation, mass hysteria and hype or whatever else. Buy the rumour, sell the news.

Item X is crashing hard. The Market is crashing. I am shaking and panicking. Should I Sell?
Stay calm, take a deep breath and find out what is really going on and what you really think about it. As an example: there was a huge panic when gambling sites were being banned. Many people panicked and sold their items for ridiculously low prices. People were telling eachother that the skin market will crash and never recover if there is no gambling and the world is going to end. And here we are in 2019, and almost everything (including skins) is at its all time high. However, sometimes you just need to sell fast. Let's say you have a skin from a collection which was inactive for a long time, making the prices of the skins go very high, and then suddenly the collection became active again for whatever reason. Or Gaben officially tells us that he is going to do something crazy with the market which will inevitably crash everything. In that case yes, sell fast (just an example)

Useful sites and tools

Use all external sites, tools and addons at your own risk, some are risky to use, some old and not updated


Chrome addons:

Useful Youtube Channels





Credits
Helicobacter: FAQ 2.0 (huge shoutout, copied a lot of stuff from this FAQ, sometimes word by word)
Steamfrag: Very useful graphs and market data

Disclaimer: The information offered here is not financial advice. We, the mod team, are just a bunch of gamers and hobby investors. Do your own due dilligence before investing any real money in to a game and do it at your own risk! Use all external links, sites, tools, addons, etc. at your own risk! Any information in this thread may be outdated at any given time. You should be mentally prepared to lose everything invested in virtual items. Valve could change the rules affecting the market anytime. Third party cashout and trading sites and their BOTS could be banned anytime. External events such as successful lawsuits against Valve, new state laws, new country laws, etc. could also affect the market anytime by forcing Valve to take measures (for instance case opening is now restricted in Belgium and Netherlands, OPSkins got banned, Gambling sites were banned, etc.). Also note that all of your items legally belong to Valve, even if you paid for them.


Suggestions and potential corrections to this guide are always welcomed and will be added if necessary and approved by the mod team. I will try to keep this guide updated.

Last updated: Nov. 2019
submitted by HostileHero to csgomarketforum [link] [comments]

test

Guide to Trading Future Calendar Spreads
Do you want to jump in trading futures but scared of the immense leverage they bring? Scared if you buy just one /CL contract at $60 and say Saudi Arabia tweets they're going to flood the oil market and suddenly /CL is trading at $30, meaning you've lost $30,000 overnight? Then you should check out Spread Trading!
Note: I originally wrote this two months ago as trading futures has a lot of idiosyncrasies I needed to absolutely cover for you guys. Thanks to beer-virus /CL really did drop from $60 to $30~ at the time I posted this. Spread trading would have drastically hedged your losses vs raw contracts.

What is Spread Trading?

Are you familiar with pairs trading in the equity world? The same idea exists in the futures world and it's the way to go. There are two types of spread trades:
The Calendar Spread - also known as a Intracommodity Spread. The trader goes long in one month contract and short in another month, both in the same commodity. For most commodities a bullish position is long in the closer month and short in the longer month. Bullish price action tends to increase prices in contracts that expire sooner than later on contracts.
One popular calendar trade is the "famed" natural gas (/NG) "widowmaker" spread - trading the March and April natural gas contracts. March is generally the end of winter weather while April is the start of summer. A bullish bet on natural gas will long march and short April, while a bearish bet will take the opposite trade. This spread has a "probablistic" floor of $0.00. If it goes negative it means March contracts is a lot cheaper than April and that would be very unusual. You can get in at say $0.05, risking $500 per contract, and if the spread up to $0.50 you'll have a position worth $5,000. In the past under severe winter weather the spread has shot up to $1.5 or $15k per contract or even more... Now, why is it called the Widowmaker? Imagine if you sold short the spread ; made the bearish bet...
The Intercommodity Spread - a trader goes long in one commodity and shorts a related commodity. Some popular examples are crude oil and heating oil, or corn and wheat. Taking corn and wheat, for example, wheat tends to trade higher than corn but most people will turn to corn products if the difference is too high. Suppose wheat got unreasonably high compared to corn. A trader could decide to short wheat and long corn, expecting the wheat price to drop faster relative to corn and making a "reversion to the mean" sort of play.

Why trade spreads?

It lowers your margin! It's generally safer and less volatile. (Shorting the natural gas widowmaker being an exception.) Let's use Natural Gas's Widowmaker as an example (/NG) as an example. The contracts have a +10,000 delta for march and a -10,000 delta for April, leaving a net delta of 0. This position uses very little margin but has wide swings and huge risk reward potential. It's almost like buying a call option with no theta burn and having to front very little money, as futures are marked to market daily. Your actual losses and gains come directly out of your futures account cash balance (or a margin loan if you have no cash balance.) You're free to invest your cash balance you receive each day if you're on the right end of the trade.
Note: for regulatory reasons while your brokerage shows your futures positions on your brokerage account it's a segregated account at a subsidiary of your broker. Meaning on Reg-T Margin trading futures comes out of "Option Buying Power" or is treated the same as withdrawing cash. Keep this in mind or you may have a surprise margin interest bill even though your broker's cash balance is showing positive say from options premium selling. Since it's a different account Box-Spread Financing or options premium selling can't be offset, so you have the possibility of having a debit margin balance unless you have actual cash for the futures themselves. Most brokers will auto sweep cash to your stock/margin account but TD Ameritrade is problematic and auto-sweeps sometimes don't happen. You can easily contact customer service and they'll sweep out the cash balance whenever you request.
Exchanges even lower margins for various Intercommodity spreads. Let's say wheat is getting some crazy price action due to a new fungus that's destroying wheat crops, while corn is remaining very stable, and you want to long wheat because of this. Just longing wheat will use a ton of margin. However, the future exchanges give you a 60% margin reduction credit if you short corn based on historical correlation. You free up some significant margin to put more on your trade. You still have downside protection if something unexpected happened to the grain market as a whole like the USA banning all grain products in food thanks to the success of the low carb keto diet.

Trading individual futures contracts contains hidden currency risk

Going long on just the underlying future contract is very deceptive. Going long on just /CL is not just a bullish bet on oil, it's a bullish bet on oil and a bearish bet (shorting) USD. Why is it shorting the almighty American Dollar? Well, what are the contracts priced in? USD! If the US dollar rises oil should drop in price as the whole world buys oil in other currencies and not just in USD.
By making a spread trade on /CL you cancel out USD and are purely betting long or short oil. Changes to USD are very likely to affect both contracts the same amount. To account for relative velocity between the expiration dates of the two contracts I'll add + sign, one for each month the nearer contract is ahead of the far contract. Here is a math example trade:
Bullish on oil, long the July contract and short the December contract. July Contract: +++++long oil, short USD December Contract: short oil, long USD Final Position: ++++long oil
You can see how short USD and long USD cancel out now. Need a easy way on how to remember trading raw contracts by themselves are a bet on USD? Just remember there are futures on euros and other currencies which are all denominated in USD.
Using my + method is a good way to think about the interaction between near and far dates as to the velocity and acceleration of price changes. Oil typically increases in price in summer months. Trading July vs August will be a small spread. If July increases in price then so will August. July is likely to increase faster as more people travel and drive in July in general in America than August but lots of people still travel in August and so it'll be a very small increase. July will increase much faster than December, with the far time away giving people who need oil in December time to acquire and wait for better prices, thus less price movement/action! Price increases need to sustain that long until December! This brings up one risk of spreads is seasonality risk.
Yes, as a rule of thumb generally a bullish beat is long the front and short a later month. However, there is seasonality to the trade. Long June and short July in oil will not behave this way, and in-fact is a bearish bet. This is known as seasonality risk. More people are expected to travel in July so with how oil behaves naturally it's more likely it'll spike harder and faster in the July contract than the June contract. It's of course not guaranteed - imagine if there is a shortage and suppliers can't even supply June. Best way of avoiding seasonality? Spread out your long and short bets across different seasons.
Going back to the Natural Gas example you can think of seasonality as longing a fall and shorting a winter contract will also tend to be a bearish bet, as winter contracts tend to increase a lot higher and faster than fall or summer contracts. Of course this isn't certain - have a early winter snowstorm in Fall before enough natural gas is stored is certainly going to spike fall natural gas contracts relative to winter contracts. This is another great example of seasonality risk.

Ok, trading spreads sounds great, but how do I actually trade spreads?

There are two options available: The spread market and the composite market. I'll break it down how it operates on Thinkorswim. Other platforms may vary.
First, I'll talk about the composite market. This is the simplest trade order but it's very risky. You have to execute two orders at the same time - such as a "blast all" order, and hope you get good fills. This is like legging into a call/put option spread trade - trying to long and short two different call options at two different strikes. You're trying to get in a good position. Unfortunately this may be your only choice, especially if it's a more advanced Intercommodity Spread you're trying to trade. You can chart the composite market simply in TOS by charting say this year's widowmaker spread by typing in: /NGH20-/NGJ20
Enter the spread market: Fortunately there are many popular spreads you don't need to leg in yourself! They have markets set up that take orders specifying the spread amount you want to buy and market makers will fill orders for you. The famed widowmaker has it's own spread market set up by the exchange. In the Desktop TOS app you can access it via the dropdown on the top of the quote screen changing "Spread: Single" to "Spread: Calendar." This will show you every spread market that is officially established on the exchanges. You can also do charting and buy on the spread market by typing in: =/NGH21-/NGJ21
The equals sign in-front of the two future products is VERY important. This is TOS's shortcut to chart and place orders on the spread market. All the price and volume shown here is what was traded on the spread market. Without the equals sign it's the composite market and the price/volume shown is just the sum of the price/volume of the two futures individually traded vs other traders explicitly trading spreads. Note: I don't know how other brokers let you make orders on the spread market. The equals sign may just be unique to TOS.
Special note for mobile users of Thinkorswim - for the longest time I was very frustrated with trying to trade calendar spreads on mobile. I used to set up large GTC orders from the desktop app that'd never get filled so I could adjust on mobile. I then learned about the damn equals sign and it's a hidden cheat code to unlock spread orders on mobile. Put in the damn equal sign and you can place mobile spread market orders with ease. There is no UI option to access spreads to trade futures on mobile on TOS.
If a spread market exists always trade the spread market. Don't risk trading the composite market.
Note for TOS mobile users - the home screen on mobile will always quote your home screen calendar position on the composite market which will lead to wild price displays. Don't freak out about this, you're most likely not losing thousands of dollars then gaining thousands of dollars over the manner of minutes. The desktop app properly quotes the spread market if it exists. This gives me a good idea to try out algorithmic trading and see if there is any arbitrage opportunities between composite and spread markets, but I bet it's there is huge competition there already.

Check out my other guides:

Box Spread Financing for extremely cheap 0.85% margin interest rates.
(now 0.50% APR due to interest rates dropping more lol.)
Portfolio Margin is 10x worse than 1R0NYMAN's box spread trick

TL;DR what strike/option/call/etc

This guide was about spreads trading... I guess /CL $30 strike future option calls, oh you gambler.
submitted by Adderalin to PostPreview [link] [comments]

Short Box Spread Conceptual Work Through

Please correct the following if it isn't factually correct in the comments section and I'll edit the post.
So I familiarized myself with 1ronyman story. Although it serves to be a lesson on leverage, I believe the box spread strategy which on a false assumption (similar to the one I made naively when creating my last post on BYND) of being risk free or impossible to go tits up served to sunset 1ronyman's chronicle and has delegitimized the strategy in the process. What should be avoided and censured is thinking that this is a form of riskless arbitrage. However, I find it fruitless to discourage, as to be reductive, the use of short box spreads simply on the basis of their misuse by an over levered retail trader who unflinchingly bet his entire account value and then some without due understanding of this particular strategy's risks and nuances.
Box Spread Strategy without Early Assignment
(# are to make a comment in the formula)
  1. When you initiate a short box spread strategy you are effectively creating an inverted spread such that at the very most you will be able to close out the spread for the distance for which it was inverted and a de minimus premium for market makers to close out what would be itm (this assumes the underlying at 4:00 pm is between the strikes of the short legs of either spread).
P/L=Credit incurred over inverted width ("can't go tits up" risk arb differential) - market making discount to close entire position before expiration
2) The other scenario at expiration would be that both short legs were assigned in which case you would pay (in the case of BYND) a hard to borrow fee as your broker borrows shares to deliver to the long call holder you were short the following monday while you would cover the same day but still pay a t+1 borrowing fee either immediately or if your able to use the shares you've been put by your ITM put position, the latter which may involve price differentials and time gaps between the two assignments either to the detriment of the strategy or not.
P/L=Credit incurred over inverted width - borrowing fee - commissions related to underlying #potentially assuming cover from open market purchase and not from put assignment#
3) Finally, assuming no early expiration, if one of the spreads is untested while the other one is deeply ITM (the fact that one of the spreads in untested implies that your long leg of the tested spread is ATM or ITM as well), you will be assigned at expiration and depending on whether you would want to speculate on the pre-market movement of the underlying you would choose to exercise your ITM long leg in your tested spread (the pre-market movement should be greater than the cost of selling the stock from your exercised long call such that you are hedged for any increase between the time your broker borrowed and deliver to the long call holder that you were short and the time you cover)
P/L=Credit incurred over inverted width - borrowing fee (if call side is tested) -commissions related to underlying
Box Spread Strategy with Early Assignment
The following scenarios may be as catastrophic as that experienced by 1ronyman or may be more docile than they appear. First of all, I'm assuming that the spread will be made on a series whose tenure doesn't include any expected dividends given the obvious impetus for early assignment in the first place.
  1. One scenario that ken385 pointed out would be if the call spread were assigned early (I added this) but it was in between the inverted spread and you paid hard to borrow fees in the case of BYND. The risk you would be left with is the untested spread in which the stock may move in the opposite direction. Therefore, to avoid this situation (every opposite move would decrease your credits initially incurred) you would pay to close out the untested put spread and pay for premium.
P/L=Credit incurred over inverted width - borrowing fee (if call side is tested) - extrinsic value paid to close out put spread #You may speculate that the direction will continue in a favorable direction and therefore will not pay to close out the other side (less likely given the early assignment was made in between the inverted spread).
2) A similar scenario would be if the put spread were assigned early, which appears more likely as deep itm puts will have less time value premium to begin with than their call counterparts. A similar conclusion is made less the borrowing fees
P/L=Credit incurred over inverted width - extrinsic value paid to close out call spread (likely option given price reversion from a lengthy downside move)
3) A third scenario would be similar to scenario (without early assignment) number 3 which assumes one of the spreads is untested and neither of its legs are ITM. Therefore, one may have more of a buffer to avoid having to pay extrinsic value to close out the untested leg. They may then have exposure to profit if the direction continues to head in the way that made the tested leg deeply ITM.
P/L=Credit incurred over inverted width -borrowing fees (if call side is tested) + any gains from remaining long leg of tested spread up until the short leg of the heretofore untested spread becomes ATM at which point losses will amass or you sell your long call/put for its remaining extrinsic value
4) The final scenario may be the worst. This assumes that your broker will automatically exercise your long leg position if it too is ITM during the early assignment of either of your spreads. You will lose any extrinsic value you held in the long call/put. However, this will only impact future exposure and potential for gains then reduce from your actual P/L
P/L=Credit incurred over inverted width - borrowing fees (if call side is tested) - #extrinsic value if you were to sell the ATM long call or any future exposure to constancy in the movement of the price of the underlying
Worst-Case Scenario:
Your broker automatically exercises your long leg positions based on an early assignment, you pay hard to borrow fees, and pay the remaining extrinsic value to close out your exposure to the unassigned side all while you are in a high vomma (acceleration of change in option value due to change in IV) environment. Whatever credit you incurred that "couldn't go tits up" is wiped out by the premium you had to pay to close the spread. Extra trouble if this assignment is early.
Best-Case Scenario:
Your short put leg is deeply ITM such that your long put leg is ATM which renders your short call leg worthless at expiration. You don't need to purchase shares in the open market to put from your long put position as a hedge towards further downward price movement pre-market on monday. You get put the shares on monday and they subsequently rise. You therefore made credit above the intrinsic value of the inverted spread at expiration, avoided borrowing costs and stock commissions, and experience an unrealized gain above the intrinsic value credit you made by opening the box spread in the first place.
Verdict
Through my acquaintance with 1ronyman's story and further investigation into box spreads, it appears that they may be created on a low IV stock with less dte. Therefore, this opportunity seems to be snuffed by market makers.
I would be curious if anyone could decide how much credit incurred above the intrinsic value of the inverted spread set up in the short box spread as percentage of the intrinsic value of the inverted spread should be given a look or two as a necessary feature to enter a short box spread trade.
submitted by moodoid to options [link] [comments]

Short Box Spread on BYND JUN contracts

Short Box Spread on BYND JUN contracts
Substantial ($95) cushion from mid of bid-ask to set up a credit box spread. Potential arb opportunity on JUN BYND contracts? What would be the explanation for this occurrence given this was taken before market close. Note: This wasn't inspired along the lines of demented WSB fanfare. I made a ignoramus assumption and I have updated the post expounding upon the dynamics of the box spread.
EDIT:
Please correct the following if it isn't factually correct in the comments section and I'll edit the post.
So I familiarized myself with 1ronyman story. Although it serves to be a lesson on leverage, I believe the box spread strategy which on a false assumption (similar to the one I made naively when creating this post) of being risk free or impossible to go tits up served to sunset 1ronyman's chronicle and has delegitimized the strategy in the process. What should be avoided and censured is thinking that this is a form of riskless arbitrage. However, I find it fruitless to discourage, as to be reductive, the use of short box spreads simply on the basis of their misuse by an over levered retail trader who unflinchingly bet his entire account value and then some without due understanding of this particular strategy's risks and nuances.
Box Spread Strategy without Early Assignment
(# are to make a comment in the formula)
  1. When you initiate a short box spread strategy you are effectively creating an inverted spread such that at the very most you will be able to close out the spread for the distance for which it was inverted and a de minimus premium for market makers to close out what would be itm (this assumes the underlying at 4:00 pm is between the strikes of the short legs of either spread).
P/L=Credit incurred over inverted width ("can't go tits up" risk arb differential) - market making discount to close entire position before expiration
2) The other scenario at expiration would be that both short legs were assigned in which case you would pay (in the case of BYND) a hard to borrow fee as your broker borrows shares to deliver to the long call holder you were short the following monday while you would cover the same day but still pay a t+1 borrowing fee either immediately or if your able to use the shares you've been put by your ITM put position, the latter which may involve price differentials and time gaps between the two assignments either to the detriment of the strategy or not.
P/L=Credit incurred over inverted width - borrowing fee - commissions related to underlying #potentially assuming cover from open market purchase and not from put assignment#
3) Finally, assuming no early expiration, if one of the spreads is untested while the other one is deeply ITM (the fact that one of the spreads in untested implies that your long leg of the tested spread is ATM or ITM as well), you will be assigned at expiration and depending on whether you would want to speculate on the pre-market movement of the underlying you would choose to exercise your ITM long leg in your tested spread (the pre-market movement should be greater than the cost of selling the stock from your exercised long call such that you are hedged for any increase between the time your broker borrowed and deliver to the long call holder that you were short and the time you cover)
P/L=Credit incurred over inverted width - borrowing fee (if call side is tested) -commissions related to underlying
Box Spread Strategy with Early Assignment
The following scenarios may be as catastrophic as that experienced by 1ronyman or may be more docile than they appear. First of all, I'm assuming that the spread will be made on a series whose tenure doesn't include any expected dividends given the obvious impetus for early assignment in the first place.
  1. One scenario that ken385 pointed out would be if the call spread were assigned early (I added this) but it was in between the inverted spread and you paid hard to borrow fees in the case of BYND. The risk you would be left with is the untested spread in which the stock may move in the opposite direction. Therefore, to avoid this situation (every opposite move would decrease your credits initially incurred) you would pay to close out the untested put spread and pay for premium.
P/L=Credit incurred over inverted width - borrowing fee (if call side is tested) - extrinsic value paid to close out put spread #You may speculate that the direction will continue in a favorable direction and therefore will not pay to close out the other side (less likely given the early assignment was made in between the inverted spread).
2) A similar scenario would be if the put spread were assigned early, which appears more likely as deep itm puts will have less time value premium to begin with than their call counterparts. A similar conclusion is made less the borrowing fees
P/L=Credit incurred over inverted width - extrinsic value paid to close out call spread (likely option given price reversion from a lengthy downside move)
3) A third scenario would be similar to scenario (without early assignment) number 3 which assumes one of the spreads is untested and neither of its legs are ITM. Therefore, one may have more of a buffer to avoid having to pay extrinsic value to close out the untested leg. They may then have exposure to profit if the direction continues to head in the way that made the tested leg deeply ITM.
P/L=Credit incurred over inverted width -borrowing fees (if call side is tested) + any gains from remaining long leg of tested spread up until the short leg of the heretofore untested spread becomes ATM at which point losses will amass or you sell your long call/put for its remaining extrinsic value
4) The final scenario may be the worst. This assumes that your broker will automatically exercise your long leg position if it too is ITM during the early assignment of either of your spreads. You will lose any extrinsic value you held in the long call/put. However, this will only impact future exposure and potential for gains then reduce from your actual P/L
P/L=Credit incurred over inverted width - borrowing fees (if call side is tested) - #extrinsic value if you were to sell the ATM long call or any future exposure to constancy in the movement of the price of the underlying
Worst-Case Scenario:
Your broker automatically exercises your long leg positions based on an early assignment, you pay hard to borrow fees, and pay the remaining extrinsic value to close out your exposure to the unassigned side all while you are in a high vomma (acceleration of change in option value due to change in IV) environment. Whatever credit you incurred that "couldn't go tits up" is wiped out by the premium you had to pay to close the spread. Extra trouble if this assignment is early.
Best-Case Scenario:
Your short put leg is deeply ITM such that your long put leg is ATM which renders your short call leg worthless at expiration. You don't need to purchase shares in the open market to put from your long put position as a hedge towards further downward price movement pre-market on monday. You get put the shares on monday and they subsequently rise. You therefore made credit above the intrinsic value of the inverted spread at expiration, avoided borrowing costs and stock commissions, and experience an unrealized gain above the intrinsic value credit you made by opening the box spread in the first place.
Verdict
Through my acquaintance with 1ronyman's story and further investigation into box spreads, it appears that they may be created on a low IV stock with less dte. Therefore, this opportunity seems to be snuffed by market makers.
I would be curious if anyone could decide how much credit incurred above the intrinsic value of the inverted spread set up in the short box spread as percentage of the intrinsic value of the inverted spread should be given a look or two as a necessary feature to enter a short box spread trade.
Taken 30 seconds before market close
submitted by moodoid to options [link] [comments]

Options/Trading 107: Risk and Strategy (Part II-B)

NOTE: this is the second part of a "single post" which was split in two because of character limits and is a Continuation from Options/Trading 106: Risk and Strategy (Part II-A)
DAY TRADING
This isn't options specific, but still an important topic worth exploring. Day trading involves very short term bets, usually speculating on sharp moves in stocks or overall markets, and can last anywhere between a few minutes to the whole day. Because of this, it is important to pick options which will be very closely tied to the moves in the underlying price. If you remember, this is measured by the greek Delta: the higher the delta, the more sensitive the option's price will be to moves of the underlying. Ideally, the best candidates will have a delta of 100.
So what has highest delta? Yes, the more in the money (ITM) an option is, the higher the delta. But the highest possible delta, is actually the underlying share itself. Nothing is more sensitive to a stock's price move than its own actual price. That's right, day trading actual stocks is actually more effective than trading options. So why do people day trade options? Probably because of their leverage characteristics that allow traders to be exposed to more shares with less money. But if you consider the actual the stock price, cheaper commissions and lack of an expiration date (allowing you to hold the stocks indefinitely if you're caught on the wrong side of a bet), I would argue that it's safer to just trade the actual stocks. Even if you want a short a position without unlimited risk or want leverage, you can turn to inverse and leveraged ETFs.
MULTI-DIMENSIONAL OPTIONS STRATEGIES
Ever wonder what happens when a bear strangles a naked butterfly with a broken wing using an iron condor to spread it diagonally? Me neither. But you may have heard options traders have seemingly intelligent discussions about it and wondered why. They're the names given to various options strategies and they come in long, short, neutral, and volatile flavors. Iron condors, butterflies, horizontal, vertical, diagonal, box, calendar and others typically refer to some kind of spread or strangle strategy which involves combinations of buying and/or selling calls and puts across different strike prices and expiration dates.
As you know by now, there are at least 3 input variables affecting our sacred premium and they all work independently. Stock prices are set by supply and demand, allowing us to graph them easily and visualize the movements easily. Unfortunately, options don't give us that luxury. Instead, we're forced to freeze most variables and explore only 2 at a time and most simple strategies are implemented with that in mind.
These fancier spreads or strangles attempt to capture, contain and/or isolate the risk/opportunity posed by the many moving parts.
Lets explore the moving parts. Here's the factors you should be considering for each independent strategy, along with a quick cheat sheet. Also keep in mind that you can be on either side of the bet for each factor:
That's all that comes to mind right now, but I'm sure I'm missing more. That's also a lot to absorb and consider for each bet. Therefore my recommendation is to always back-test your strategy before implementing it, as it's easy to miss something.
With regards to discussing the actual strategies, I'll let you look them up (as the information is widely available). I wanted to link to a site which had an awesome layout which I read in a comment recently in response to a noob asking if "Iron condors" was some code name. But for the life of me, I can't find it. If one of you can find it, or remind me in the comments and I'll put it up here.
ARBITRAGE
There's one last factor that affects options prices that I haven't really talked about - market imperfections. For obvious reasons, a lot of what I've discussed has been on theoretical/mathematical models which explore the way things interact. However, once we take that platform to the real world we can no longer live under those assumptions. At the end of the day, options prices are pretty much defined by supply and demand and are empirically tied to the Black-Scholes model. However, it's not always the case and sometimes end up violating the Put-Call parity which create arbitrage opportunities.
Arbitrage is a fancy word for cheating, and assume guaranteed or risk-free profits. Here's an easy-to-understand real world analogy: Let's say you work at an electronics store, which gives you a 15% employee discount for all products. In theory, you could buy a popular item at a discount like say, an iPod, and then sell it eBay at market price. This would pretty much guarantee you make 15% of your "investment" with virtually no risk.
Given market imperfections in options market, arbitrage opportunities pop up all the time and if you find yourself spotting one, you can have a small window of time (before others beat you to it) to make a quick buck. This is especially sought after with options tiny pricing errors grow are magnified thanks to the leverage built into options.
Here's a decent resource I found on this
Alright folks, that's it. It's been fun and thanks to those of you who kept me on my toes - thanks to you I was pressured to double check the facts I was unsure of, which led me to learn from this experience alongside others.
submitted by jartek to investing [link] [comments]

How BitMEX works: Liquidity and leverage

So once again guys, we are here, trying to learn the tough lessons and dispelling those myths at the same time.
Let's start with liquidity. Where does it come from?
First of all lets turn to the reference material on the exchange. On page one, we find this:
Let's let this ferment thoroughly. All contracts traded on BitMEX are traded between market participants. Now it is true, that one of those market participants is BitMEX, who provides liquidity as a market maker but has a stated goal to be PnL neutral.
All money on the exchange comes from market participants. When you win or lose a 'bet' as a speculator, it is the market participants that are paying you or whom you have to pay. The money that gets transfered all come from the margins that get reserved when you enter a position.
Who are these people?
I would categorize market participants into three groups:
Based on earlier statements by BitMEX CEO Arthur Hayes, but taking into account how the crypto world has changed and is changing, I would estimate that about 90% of people are speculators and the rest are equal market makers or arbitragers, some probably both.
The key point is, when you sell something, someone else is buying and when you buy something, someone else sold it to you. There are no middle men. When you as a speculator made a good deal, someone else made a bad deal. It is 100% 1:1. There is no bookmaker or bank or whatever, who sits behind the the counter with a hidden pool of cash, offering you the odds on bets. It is all handled between market participants. All the exchange does is that it gives you a playing field and sets the rules of the game. We are the ones that play it.
What is leverage?
This is a tough one, apparently, to grasp. I have officially lost track of the number of times I have tried to answer this question on reddit. (lol?)
First things first. What is leverage not? Leverage is not odds!!! No matter how much speculators like to think of it as gambling, trading is not bookmaking and you are not getting odds on your bets! The sooner you stop thinking of leverage this way, the sooner you start making rational trading decisions.
Leverage is a trading tool. It allows you to handle risk associated with speculation, and it allows market makers and arbitragers to provide more liquidity. Since we aren't trading physical currency, we need some way to do the accounting. Leverage provides the mechanism for this.
When a product is leveraged 100x, what this means is, that you are allowed by the exchange to trade a number of contracts that has a notional value that is 100 times higher than the margin you have have available.
The thing that makes this posible, is the liquidation engine. The liquidation engine tracks your position in real time and when it notices that a substantial amount of your account margin is lost because a certain position you are holding has lost value, then it automatically liquidates your position and you lose your margin.
Getting liquidated is bad! When you get liquidated, you lose up to 50% of your equity to the insurance fund. This is litterally throwing money down the drain! If you are a market maker or arbitrager, you should not get liquidated ever. It will annihilate your profits completely! As a speculator, there may be cases where getting liquidated isn't so bad. Some successful traders run a strategy where they are actually losing on the majority of their positions, but when they are right, they are right big and it makes up for the losses. Getting liquidated on positions that go bad, would probably not mean the end of the world for such a trader, but still, why give money away for free?
How is 100x leverage even possible? Where does the money come from?
Well as we started out discussing. The liquidity is provided by other traders. There is no central source of funds.
Key question: What incentivizes other traders to take your 100x gamble?
The Answer comes in two parts.
First, a lot of the people you are betting against are simply other speculators who are bad at guessing where the price is going. It is a simple as that.
But secondly, there is incentive from the market(s) themselves. If enough gamblers want to go long 100x, what happens?
The price will obviously go up and will create a price disparity between BitMEX and other exchanges, and I am telling you. Arbitragers are litterally foaming at the mouth for this opportunity!! They couldn't give two turds about losing your 100x bet. They have bought the assets elsewhere, and have covered their delta. They only care about the sweet sweet premium you are willing to pay for the priviledge of getting your 100x lottery ticket.
And that, my fellow redditors, is how 100x leverage on BitMEX becomes possible.
Edit: For presentation.
submitted by Glaaki to BitMEX [link] [comments]

Colored Coins vs ERC20 Tokens - The future of Futures?

#blockchainbank
J. R. Willett's "The Second Bitcoin White paper" describes (among other things) user currencies which track value of a specific assets without being backed by that asset by issuer.
At first this seems to be counter-intuitive... You can't create digital gold out of nothing.
However, something very similar happens on derivative markets. For example, futures price converges towards spot price by the date of settlement on futures market. This happens according to no-arbitrage condition: difference in price would create an arbitrage opportunity which would level this difference.
If you consider cash-settled futures, exchange operator effectively moves money from pockets of those who have "lost the bet" into pockets of those who won during the settlement. This forced transfer creates potential arbitrage opportunity at the time of settlement, which forces price convergence.
If we can implement something like cash-settles futures on a decentralized market we'll be able to create a digital asset with price pegged to physical asset price which won't be backed by physical asset. Price will be stabilized by speculations.
However, using futures directly would be inconvenient.
J. R. Willett outlined a stabilization approach involving two different assets linked together, let's call them GoldShares andGoldCoins. Price of GoldCoins is supposed to track price of gold, while GoldShares is very unusual kind of derivative which lets people to bet on demand for GoldCoins. They are linked together in such a way that GoldCoin supply will beable to fluctuate, compensating for changes in demand and making sure that price is more-or-less stable.
However, what paper outlines is a long-term stabilization and I doubt it would work very well. I'll quote the paper:
I believe there is a more straightforward way to implement this: GoldCoins can be created or destroyed instantly, forcing price to fall into a very narrow corridor. Moreover, this approach is compatible with colored coins which are not as flexible as Ether ERC20 Tokens.
Here's how we do this: suppose we have separate order books for GoldCoins and GoldShares. Price pegging is implemented by issuer, he defines acceptable price range for GoldCoins, fixing it each day, for example.As long as price is within that range nothing special happens, order are matched like with normal p2p trade.
Now suppose that price range for GoldCoin today is 0.9 .. 1.1 BTC. Somebody puts a bid at 1.2 BTC and it is not matched.
What happens?
The Issuer intervenes and creates new GoldCoins to satisfy this extra demand. To keep things balanced he needs to destroy GoldShares. Effectively oldShares are converted into GoldCoins.
At what rate? Obviously converting 1 GoldShare into 1 GoldCoin ain't going to work.
I think it works perfectly if we use this formula: one GoldShare creates
(GoldShare price) / (GoldCoin price) = GoldCoins.
Here's what it means: if GoldShares are in shortage and their price is high, one GoldShare creates a lot of GoldCoins.When GoldShares are abundant and their price is low, you need many GoldShares to create one GoldCoin.
So supply is going to be very flexible, if demand is high we can create practically unlimited amount of GoldCoins, driving GoldShares ask price higher and higher.
If demand is low and GoldCoin price is falling, we'll create lots of GoldShares.
However, this scheme isn't perfect. When there is a massive sell-off of GoldCoins, we are essentially limited to whatever liquidity is on bid side of GoldShares.If bid price goes very low, GoldCoin price will fall below lower threshold, potentially to zero.
As J.R. Willett writes, in that case a reserve fund might help the situation. Issuer gets some money (e.g. Bitcoins) when he sells initial GoldShares. He should use that money to buy them back. However, in colored coin-based protocol we can't really force issuer to do anything.
So, to summarize, non-backed pegged currency price can be stabilized via a speculative market to a certain degree.However, in case of a catastrophic sell-off we are at mercy of issuer.
Perhaps there is a better way to do it, via futures-like instruments or something like that.
Final thoughts...
I think that I described as Goldcoins and Goldshares is a private case of multiple issuers to the same asset, each of them making a market allowing the buyers and sellers to define the spread between the 2 issuers. An example of this in current market structures are buy side and sell side market makers on exchanges, very common in the US.
I believe a more abstract and free market approach, would be for each issuer to decide if they are also a market maker which means they continuously place either buy or sell orders or both, and enable in p2p trade to define assets like gold which are supported by more than one color.
This translates the risk of the issuer or market maker into the spread between the bid ask, so the exchange rate of gold is as thin as there are more trustable issuers and market makers.
For example i am willing to sell gold at market+100 pips, and buy gold at market-100 pips, as a single issuers the risk of holding the asset depends on trusting that I will always buy/sell in the market. If there are 20 different market makers then the risk is the is lower as all you need as the holder; is to trust that one of them will remain a market maker when you want to sell.
I think we are almost ready to issue Goldcoins backed (partially) by bitcoin or create an ERC20 Token on Ether, who wants to buy some Goldcoins ?
#blockchainbank #tokens #tokenized #etherCfd
submitted by geopayme to BlockchainBanknTrust [link] [comments]

Perpetual Option: Och-Ziff Capital Management Group (OZM)

In his book, You Can Be a Stock Market Genius, Greenblatt talks about using LEAPs to make leveraged bets. The book included his trade in Wells Fargo (WFC, another topic for a future post, I suppose).
But sometimes, stocks get down so cheap that they become priced like options. In the Genius book, the WFC LEAPs were priced at $14 while the stock was at around $77.
Here, we have a hedge fund manager trading less than $3.00/share, which is a typical price for regular options, not even LEAPs. Of course, all stocks are options on the residual value of businesses. But sometimes things are priced for either a large gain or zero, just like an option.
I call this a perpetual option, but that reminds me of those lifetime warranties. Like, who's lifetime? The manufacturer's? The store's? Yours? Nothing is forever, so I guess there really is no such thing as a perpetual option. But anyway...
Och-Ziff IPO'ed in 2007 at $32/share and traded in the mid $20's right before the crisis, then down to below $5.00 during the crisis and back up to the mid-teens. I've been watching this since the IPO and looked at it again when it was trading around $10/share. It's down quite a bit since then. I didn't own it back then but I did take a small bite down at $5.00/share.
I have mentioned other private equity and hedge fund managers here in the past but haven't owned most of them because of the amount of money that seemed to be going into alternatives. I was just worried that the AUM's of all of these alternative managers were going up so quickly that I couldn't imagine them earning the high returns that made everyone rush to them in the first place. Look at the presentation of any of these alternative managers and their AUM growth is just staggering.
Extremely Contrarian We investors walk around and think about all sorts of things; look at store traffic, taste new foods/restaurant concepts, count how many Apple watches people are wearing (I recently biked around the city with my kid (Brooklyn to Central Park, around the park (around the big loop) and all the way downtown back to Brooklyn (30+ miles) and I think I counted two Apple watches that I saw compared to countless iPhones. And this was in the summer so no coats or long sleeves to hide wrists).
And a couple of the things that we tend to think about are, What does everybody absolutely love, and what are they 100% sure of (other than that Hillary will win the election and that the market will crash if Trump wins), and What do people absolutely, 100% hate and don't even want to talk about? In the investing world right now, it seems like the one thing that everybody seems to agree with is that active investing is dead (OK, not completely true because we active investors never really lose faith in it). The data points to it (active managers underperforming for many years, legendary stock pickers too not performing all too well, star hedge funds not doing well etc...). The money flows point to it (cash flowing out of active managers and into passive funds, boom in index funds / ETFs; this reminds me of the 1990's when there were more mutual funds than listed companies. There are probably more ETFs now than listed companies). Sentiment points to it (stars and heroes now are ETF managers, quants etc.).
By the Way Oh, and by the way, in case people say that it is no longer possible due to this or that reason for humans to outperform indices or robots, I would just say that we have seen this before. Things in finance are cyclical and we've seen this movie before.
From the 1985 Berkshire Hathaway Letter, Most institutional investors in the early 1970s, on the other hand, regarded business value as of only minor relevance when they were deciding the prices at which they would buy or sell. This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching newly-fashioned theory: the stock market was totally efficient, and therefore calculations of business value -- and even thought, itself -- were of no importance in investment activities. (We are enormously indebted to those academics: what could be more advantageous in an intellectual contest -- whether it be bridge, chess or stock selection than to have opponents who have been taught that thinking is a waste of energy?)
What Do People Hate? So, back to what people absolutely hate. People hate active managers. It's not even stocks that they are not interested in. They hate active managers. Nobody outperforms and their fees are not worth it. What else do they hate? They hate hedge funds. I don't need to write a list here, but you just keep reading one institution after another reducing their exposure to hedge funds. There is a massive shakeout going on now with money leaving hedge funds. Others like Blackstone argues that this is not true; assets are just moving out of mediocre hedge funds and moving into theirs.
This is a theme I will be going back to in later posts, but for now I am just going to look at OZM.
OZM OZM is a well-known hedge fund firm so I won't go into much detail here. To me, it's sort of a conventional equity-oriented hedge fund that runs strategies very typical of pre-Volcker rule Wall Street investment banks; equity long/short, merger arb, convertible arb etc. They have been expanding into credit and real estate with decent results. But a lot of their AUM is still in the conventional equity strategies.
What makes OZM interesting now is that chart from the Pzena Investment report (see here). These charts make it obvious why active managers have had such a hard time. The value spread has just continued to widen since 2004/2005 through now. Cheap stocks get cheaper and expensive stocks get more so. You can see how this sort of environment could be the worst for long/short strategies (and value-oriented long strategies, and even naked short strategies for that matter). Things have just been going the wrong way with no mean reversion.
But if you look at where those charts are now, you can see that it is probably exactly the wrong time to give up on value strategies or value-based long/short strategies; in fact it looks like the best time ever to be looking at these strategies.
Seeing that, does it surprise me that many pension funds are running the other way? Not at all. Many large institutions chase performance and not future potential.
Conceptually speaking, they would rather buy a stock at 80x P/E that has gone up 30%/year in the past five years that is about to tank rather than buy an 8x P/E stock that has gone nowhere in the past five years but is about to take off; they are driven by historic (or recent historic) performance.
OZM Performance Anyway, let's look at the long term performance of OZM. This excludes their credit and real estate funds which are doing much better and are growing AUM.
This is their performance since 1994 through the end of 2015:
OZM fund S&P500 1994 28.50% 5.30% 1995 23.50% 27.40% 1996 27.40% 23.00% 1997 26.70% 33.40% 1998 11.10% 28.60% 1999 18.80% 21.00% 2000 20.60% -9.10% 2001 6.30% -11.90% 2002 -1.60% -22.10% 2003 24.00% 28.70% 2004 11.10% 10.90% 2005 8.80% 4.90% 2006 14.80% 15.80% 2007 11.50% 5.50% 2008 -15.90% -37.00% 2009 23.10% 26.50% 2010 8.50% 15.10% 2011 -0.50% 2.10% 2012 11.60% 16.00% 2013 13.90% 32.40% 2014 5.50% 13.70% 2015 -0.40% 1.40% 5 year avg 5.85% 12.57% 10 year avg 6.69% 7.32% Since 1994 12.05% 8.87% Since 2000 7.59% 5.01% Since 2007 5.14% 6.53%
So they have not been doing too well, but it's really only the last couple of years that don't look too good. Their ten-year return through 2013 was +8.2%/year versus +7.4%/year for the S&P 500 index. It's pretty obvious that their alpha has been declining over time.
For those who want more up-to-date figures, I redid the above table to include figures through September-end 2016. And instead of 5 year and 10 year returns, I use 4.75-year and 9.75-year returns; I thought that would be more comparable than saying 5.75-year and 10.75-year, and I didn't want to dig into quarterly figures to get actual 5 and 10s.
OZM fund S&P500 1994 28.50% 5.30% 1995 23.50% 27.40% 1996 27.40% 23.00% 1997 26.70% 33.40% 1998 11.10% 28.60% 1999 18.80% 21.00% 2000 20.60% -9.10% 2001 6.30% -11.90% 2002 -1.60% -22.10% 2003 24.00% 28.70% 2004 11.10% 10.90% 2005 8.80% 4.90% 2006 14.80% 15.80% 2007 11.50% 5.50% 2008 -15.90% -37.00% 2009 23.10% 26.50% 2010 8.50% 15.10% 2011 -0.50% 2.10% 2012 11.60% 16.00% 2013 13.90% 32.40% 2014 5.50% 13.70% 2015 -0.40% 1.40% 2016* 1.10% 7.80% 4.75 year 6.53% 14.58% 9.75 year 5.48% 6.72% Since 1994 11.68% 8.92% Since 2000 7.29% 5.27% Since 2007 4.82% 6.86%
So over time, they have good outperformance, but much of that is from the early years. As they get bigger, it's not hard to see why their spread would shrink.
They are seriously underperforming in the 4.75 year, but that's because the S&P 500 index was coming off of a big bear market low and OZM didn't lose that much money, so I think that is irrelevant, especially for a long/short fund.
More relevant would be figures from recent market peaks which sort of shows a through-the-cycle performance. Since the market peak in 2000, OZM has outperformed with a gain of +7.3%/year versus +5.3%/year for the S&P, but they have underperformed since the 2007 peak. A lot of this probably has to do with the previous charts about how value spreads have widened throughout this period.
I would actually want to be increasing exposure to this area that hasn't worked well since 2007. Some of this, of course, is due to lower interest rates. Merger arb, for example, is highly dependent on interest rates as are other arbitrage type trades. (The less risk there is, the closer to the short term interest rate the return is going to be.)
One thing that makes me scratch my head, though, in the 3Q 2016 10-Q is the following: OZ Master Fund’s merger arbitrage, convertible and derivative arbitrage, corporate credit and structured credit strategies have each generated strong year-to-date gains through September 30, 2016. In merger arbitrage, certain transactions in which OZ Master Fund participated closed during the third quarter, contributing to the strategy’s year-to-date gross return of +1.3%. Convertible and derivative arbitrage generated a gross return of +0.5% during the third quarter, driven by gains in convertible arbitrage positions, commodity-related volatility, commodity spreads and index volatility spread trades. Year-to-date, convertible and derivative arbitrage has generated a gross return of +1.3%. In OZ Master Fund’s credit-related strategies, widening credit spreads and certain event-driven situations added +0.4% to the gross return within corporate credit during the third quarter, while in structured credit, a +0.9% gross return during the quarter was attributable to the realization of recoveries in certain of our idiosyncratic situations. Year-to-date, the corporate credit and structured credit strategies are each up +1.2% on a gross basis. Gross returns of less than 2% are described as "strong". Hmm... I may be missing something here. Maybe it is 'strong' versus comparable strategies. I don't know. Anyway, moving on...
Greenblatt Genius Strategies Oh yeah, and by the way, OZM is one of the funds that are heavily into the yellow book strategies. Here's a description of their equity long/short strategy: Long/short equity special situations, which consists of fundamental long/short and event-driven investing. Fundamental long/short investing involves analyzing companies and assets to profit where we believe mispricing or undervaluation exists. Event-driven investing attempts to realize gain from corporate events such as spin-offs, recapitalizations and other corporate restructurings, whether company specific or due to industry or economic conditions.
This is still a large part of their book, which is a good thing if you believe that the valuation spreads will mean revert and that Greenblatt's yellow book strategies are still valid.
One thing that may temper returns over time, though, is the AUM level. What you can do with $1 billion in AUM is not the same as when you have $10 billion or $30 billion. I don't think Greenblatt would have had such high returns if he let AUM grow too much.
This seems to be an issue with a lot of hedge funds. Many of the old stars who were able to make insane returns with AUM under $1 billion seem to have much lower returns above that level.
Here is OZM's AUM trend in the past ten years. Some of the lower return may correlate to the higher AUM, not to mention higher AUM at other hedge funds too reducing spreads (and potential profits).
Just to refresh my memory, I grabbed the AUM chart from the OZM prospectus in 2007. Their AUM was under $6 billion until the end of 2003 and then really grew to over $30 billion by 2007.
Their 10-year return through 2003 was 18%/year vs. 10.6%/year for the S&P 500 index.
From the end of 2003 through the end of 2015, OZM's funds returned +7.2%/year versus +7.4%/year for the S&P 500 index. So their alpha basically went from 7.4%/year outperformance to flat.
This is actually not so bad as these types of funds often offered 'equity-like' returns with lower volatility and drawdowns. The long/short nature of OZM funds means that investors achieved the same returns as the S&P 500 index without the full downside exposure. This is exactly what many institutions want, actually.
But still, did their growth in AUM dampen returns? I think there is no doubt about that. These charts showing tremendous AUM growth is the reason why I never owned much of these alternative managers in the past few years I've been watching them.
The question is how much of the lower returns are due to the higher AUM. Of course, some of this AUM growth is in other strategies so not all new AUM is squeezed into the same strategies.
Will OZM ever go back to the returns of the 1990's? I doubt that. First of all, that was a tremendous bull market. Plus, OZM's AUM was much smaller so they had more opportunities to take advantage of yellow book ideas and other strategies.
Boom/Bubble Doesn't Mean It's a Bad Idea By the way, another sort of tangent. Just because there is a big boom or bubble in something doesn't necessarily make that 'something' a bad idea. We had a stock market bubble in the late 1920's that ended badly, but owning parts of businesses never suddenly became a bad idea or anything. It's just that you didn't want to overpay, or buy stocks for the wrong reasons.
We had a boom in the late 1990's in stocks that focused on picking stocks and owning them for the long term as exemplified by the Beardstown Ladies. Of course, the Beardstown Ladies didn't end well (basically a fraud), but owning good stocks for the long haul, I don't think, ever became a bad idea necessarily.
We had a tremendous housing bubble and various real estate bubbles in recent years. But again, owning good, solid assets at reasonable prices for the long haul never became a bad idea despite the occasional bubbles and collapses.
Similarly, hedge funds and alternative assets go through cycles too. I know many value investors are not with me here and will always hate hedge funds (like Buffett), but that's OK.
We've had alternative cycles in the past. Usually the pattern is that there is a bull market in stocks and people rush into stocks. The bull market inevitably ends and people lose money. Institutions not wanting to lose money rush into 'alternative' assets. Eventually, the market turns and they rush back into equities.
I think something similar is happening now, but the cycle seems a bit elongated and, and the low interest rates is having an effect as alternatives are now attracting capital formerly allocated to fixed income. In the past, alternatives seemed more like an equity substitution, risk asset.
Valuation OK, so what is OZM worth?
Well, a simple way of looking at it is that OZM has paid an average of $1.10/year in dividends in the last five years. During the past five years, the funds returned around 6%/year, so it's not an upside outlier in terms of fund performance.
Put a 10x multiple on it and the stock is worth $11/share.
Another way to look at it is that the market is telling you that it is unlikely that OZM will enjoy the success even of the past five years over the next few years. Assuming a scenario of failure (stock price = 0) or back to sort of past five years performance ($11), a $3.00 stock price reflects the odds of failure at 73% and only a 27% chance that OZM gets back to it's past five year average-like performance. Of course, OZM can just sort of keep doing what it's doing and stay at $3.00 for a long time too.
There is a problem with this, though, as the dividends don't reflect equity-based compensation expense; OZM gives out a bunch of RSU's every year.
To adjust for this, let's look at the economic earnings of the past five years including the costs of equity-based compensation.
Equity-based compensation expense not included in economic income is listed below ($000):
2008 102,025 2009 122,461 2010 128,737 2011 128,916 2012 86,006 2013 120,125 2014 104,344 2015 106,565
It's odd that this doesn't seem to correlate to revenues, income or AUM; it's just basically flat all the way through.
If we include this, economic income at OZM averaged around $520 million/year. With fully diluted 520 million shares outstanding, that's around $1.00/share in economic earnings per share that OZM earned on average over the past five years. So that's not too far off from the $1.10/share dividends we used above.
One of the interesting things about investing is when you find alternative ways to value something instead of just the usual price-to-book values, P/E ratios etc.
So how would you value this?
What about adjusting the implied odds from the above. What if we said there's a 50/50 chance of recovery or failure. Let's say recovery is getting back to what it has done over the past five years on average, and failure is a zero on the stock.
50% x $0.00 + 50% x $10.00 = $5.00/share
In that case, OZM is worth $5.00/share, or 70% higher than the current price. You are looking at a 60 cent dollar in that case.
Let's say there is a 70% chance of recovery.
70% x $10.00 + 30% x $0.00 = $7.00/share.
That's 130% higher, or a 40 cent dollar.
By the way, the AUM averaged around $37 billion over the past five years, and remember, their return was around 5.9%/year so these figures aren't based on huge, abnormal returns or anything.
As of the end of September 2016, AUM was $39.3 billion, and this went down to $37 billion as of November 1, 2016. OZM expects continued redemptions towards year-end both due to their Justice Department/SEC settlement and overall industry redemption trends.
The above ignored balance sheet items, but you can deduct $0.60/share, maybe, of negative equity, or more if you think they need more cash on the balance sheet to run their business.
Preferred Shares As for the $400 million settlement amount and preferred shares, the settlement amount is already on the balance sheet as a liability (which was paid out after the September quarter-end). The preferred shares were sold after the quarter ended. They have zero interest for three years so I don't think it impacts the above analysis. You would just add cash on the balance sheet and the preferreds on the liability side.
If you want to deduct the full amount of the settlement of $400 million, you can knock off $0.77/share off the above valuation instead of the $0.60/share.
Earnings Model The problem with these companies is that it's impossible, really, to predict what their AUM is going to be in the future or their performance. Of course, we can guess that if they do well, AUM will increase and vice-versa.
But still, as a sanity check, we should see how things look with various assumptions in terms of valuation.
First of all, let's look at 2015. In the full year to 2015, a year that the OZM funds were down (master fund), they paid a dividend of $0.87. Adjusted economic income was $240 million (economic income reported by OZM less equity-based comp expense) and using the current fully diluted shares outstanding of 520 million, that comes to $0.46/share. OK, it's funny to use current shares outstanding against last year's economic income, but I am trying to use last years' earnings as sort of a 'normalized' figure.
Using these figures from a bad year, OZM is current trading at a 29% dividend yield (using $3.00/share price) and 6.5x adjusted economic income. This would be 8.3x if you added the $0.77/share from the settlement above.
OK, so average AUM was $44 billion in 2015, so even in a bad year, they made tons in management fees. Fine. We'll get to that in a second. AUM is $37 billion as of November 2016, and is probably headed down towards year-end.
2016 Year-to-Date So let's look at how they are doing this year so far. Fund performance-wise, it hasn't been too good, but they do remain profitable. These fund businesses are designed so that their fixed expenses are covered by their management fees. Big bonuses are paid out only when the funds make money.
Anyway, let's look at 2016 so far in terms of economic income.
In the 3Q of 2016, economic income was $57.4 million. Equity-based compensation expense was $18.3 million so adjusted economic income was $39.1 million. Annualize that and you get $156 million. Using 520 million fully diluted shares (share amount used to calculate distributable earnings in the earnings press release), that comes to $0.30/share adjusted economic income. So at $3.00/share, OZM is trading at 10x arguably depressed earnings. (This excludes the FCPA settlement amount). If you include $400 million of the FCPA preferreds (total to be offered eventually), then the P/E would actually be closer to 12.6x.
For the year to date, economic income was $195 million, and equity-based comp expense was $56 million so adjusted economic income was $139 million. Again using 520 million shares, that comes to $0.25/share in adjusted economic earnings per share. Annualize that and you get $0.33/share. So at $3.00/share, OZM is trading at 9x depressed earnings, or 11x including the FCPA preferred.
OK, so maybe this is not really 'depressed'. With still a lot of AUM, it is possible that AUM keeps going down.
AUM was $37 billion in November, but let's say it goes down to $30 billion. That's actually a big dip. But let's say AUM goes down there. And then let's assume 1% management fees, 20% incentive fees, and economic income margin of 50% (averaged 56% in past five years) and the OZM master fund return of 5%.
In this case, economic income would be $300 million. Equity-based comp costs seems steady at around $100 million, so we deduct that to get adjusted economic income. This comes to $200 million.
That comes to around $0.40/share. At $3.00/share, that's 7.5x adjusted economic earnings, or a 13% yield, or 9.4x and 10.6% yield including the FCPA preferreds.
So that's not bad. We are assuming AUM dips to $30 billion and OZM funds only earn 5%/year, and with that assumption the stock is trading at this cheap level.
Things, of course, can get much worse. If performance doesn't improve, AUM will keep going down. You can't really stress test these things as you can just say their returns will never recover and that's that.
On the other hand, any improvement can get you considerable upside.
If assets return to $40 billion and returns average 6% over time, economic income margin goes to 56% (average of past five years), adjust economic income per share is $0.76/share and the stock could be worth $7.60/share for more than a double.
Here's a matrix of possibilities. Skeptics will say, where are the returns below 5% and AUM below $30 billion?!
Well, OK. If returns persist at lower than 5%, it's safe to assume that AUM will go down and this may well end up a zero. That is certainly a possibility. It wouldn't shock many for another hedge fund to shut down.
On the other hand, if things do stabilize, normalize and OZM recovers and does well, there is a lot of upside here. What is interesting to me is that the market is discounting a lot of bad and not pricing in much good. This is when opportunities occur, right?
5% 6% 7% 8% 9% 10% 30,000 $0.45 $0.52 $0.58 $0.65 $0.71 $0.78 35,000 $0.56 $0.64 $0.71 $0.79 $0.86 $0.94 40,000 $0.67 $0.76 $0.84 $0.93 $1.01 $1.10 45,000 $0.78 $0.87 $0.97 $1.07 $1.16 $1.26 50,000 $0.88 $0.99 $1.10 $1.21 $1.32 $1.42 55,000 $0.99 $1.11 $1.23 $1.35 $1.47 $1.58 60,000 $1.10 $1.23 $1.36 $1.49 $1.62 $1.75
The row above is the assumed return of the OZM funds. The left column is the AUM. Assumptions are 1% management fee, 20% incentive fee, 56% economic income margin (excluding equity-based comp expense) and $100 million/year in equity-based comp expense.
It shows you that it doesn't take much for adjusted economic income per share to get back up to closer to $1.00, and can maintain $0.45/share even in a $30 billion AUM and 5% return scenario making the current stock price cheap even under that scenario.
Conclusion Having said all that, there is still a lot of risk here. Low returns and low bonuses can easily make it hard for OZM to keep their best people. But if their best people perform, I assume they do get paid directly for their performance so that shouldn't be too much of an issue.
A lot of the lower returns in recent years is no doubt due to their higher AUM. But it is also probably due to crowding of the hedge fund world and low interest rates leading to an overall lower return environment for all.
If you think these things are highly cyclical, then you can expect interest rates to normalize at some point. Money flowing out of hedge funds should also be good for future returns in these strategies. The part of lower returns at OZM due to higher AUM may not reverse itself, though, if OZM succeeds in maintaining and increasing AUM over time.
But even without the blowout, high returns of the 1990's, OZM can make decent returns over time as seen in the above table.
In any case, unlike a few years ago, the stock prices of many alternative managers are cheap (and I demonstrated how cheap OZM might be here) and institutional money seems to be flowing out of these strategies.
So: OZM is cheap and is in a seemingly universally hated industry Money is flowing out of these strategies, particularly performance chasing institutions (that you would often want to fade) there is a bear market in active managers and bubble in indexing (which may actually increase opportunities for active managers) value spreads are wide and has been widening for years making mean reversion overdue etc. These things make OZM a compelling play on these various themes.
I would treat this more like an option, though. Buy it like you would buy an option, not like you would invest in, say, a Berkshire Hathaway.
There are a lot of paths here to make good money, but there are also plenty of ways to lose. If you look at this like a binary option, it can be pretty interesting!
Posted by kk at 8:11 PM No comments: Links to this post Email This BlogThis! Share to Twitter Share to Facebook Share to Pinterest
Labels: OZM
Saturday, October 29, 2016 Gotham's New Fund Joel Greenblatt was in Barron's recently. He is one of my favorite investors so maybe it's a good time for another post.
Anyway, this new fund is kind of interesting as I am sort of a tinkerer; this is like the product of some financial tinkering. I don't know if it's the right product for many, but we'll take a look.
But first, let's see what he has to say about the stock market in general.
The Market Greenblatt says that the market is "expensive". The market is in the 21st percentile of expensive in the past 25 years. Either a typo or he misspoke, he is quoted as saying that the market has been more expensive 79% of the time in the past 25 years. Of course, he means the market has been cheaper 79% of the time.
The year forward expected return from this price level is between 2% to 7%, so he figures it averages out to 4% to 6% per year. In the past 25 years, the market has returned 9% to 10%/year so he figures the market is 12% to 13% more expensive than it used to be.
He says: Well, one scenario could be that it drops 12% to 13% tomorrow and future returns would go back to 9% to 10%. Or you could underearn for three years at 4% to 6%. We're still expecting positive returns, just more muted. The intelligent strategy is to buy the cheapest things you can find and short the most expensive.
But... Immediately, bears will say that this 25 year history is based during a period when interest rates went down. The 10 year bond rate was around 8% back in 1991, and is now 1.8%. In terms of valuation, this would have pushed up asset values by 6.2%/year ($1.00 discounted at 8%/year then and $1.00 discounted by 1.8% now).
Declining rates were certainly a factor in stock returns over the past 25 years. Of course, the stock market didn't keep going up as rates kept going down. The P/E ratio of the S&P 500 index at the end of 1990 was around 15x, and now it's 25x according to Shiller's database (raw P/E, not CAPE). So the valuation gain over the 25 years accounted for around 2%/year of the 9-10% return Greenblatt states.
Here are the EPS estimates for the S&P 500 index according to Goldman Sachs:
 EPS P/E 
2016 $105 20.4x 2017 $116 18.5x 2018 $122 17.6x
Earnings estimates are not all that reliable (estimates have been coming down consistently in the past year or so). But since most of 2016 is done, I suppose the $105 figure should be OK to use.
I don't know if it's apples to apples (reported versus operating etc.), but if we assume the 'current' P/E of the market is 20x, then the valuation tailwind accounted for 1.2%/year of the 9-10%. But then of course, even if this was a fair comparison, there is still the aspect of lower interest rates boosting the economy by borrowing future demand (and therefore overstating historical earnings).
In any case, one of the main bearish arguments is that this interest rate tailwind in the past will become a headwind going forward. Just about everyone agrees with that.
But as I have mentioned before, calling turns in interest rates is very hard, Japan being a great example. If you look at interest rates over the past 100 years or more, you see that major turns in trend don't happen all that often; it's been a single trend of declining rates since the 1980/81 peak, basically. What are the chances that you are going to call the next big turn correctly? I would bet against anyone trying. OK, that didn't come out right. I wouldn't necessarily be long the bond market either.
Gotham Index Plus So, back to the topic of Gotham's new fund. It is a fascinating idea. The fund will go long the S&P 500 index, 100% long, and then overlay a 90%/90% long/short portfolio of the S&P 500 stocks based on their valuations.
The built-in leverage alone makes this sort of interesting. Many institutions may have an allocation to the S&P 500 index, and then some allocation to long/short equity hedge funds. The return of the Gotham Index plus would be much higher (when things go well).
I think this sort of thing was popular at some point in the pension world; index plus alpha etc. Except I think a lot of those were institutions replacing their S&P 500 index portfolios with futures positions, and then using the cash raised to buy mortgage securities. Of course, when things turned bad, oops; they took big hits in S&P 500 futures, tried to post cash for the margin call and realized that their mortgage funds weren't liquid (and was worth a lot less than they thought).
Or something like that.
There is risk here too, of course. You are overlaying two risk positions on top of each other. When things turn bad, things can certainly get ugly.
I think Greenblatt's calculation is that when things turn bad, the long/short usually does well. I haven't seen any backtests or anything, so I don't know what the odds of a blowup are.
Expensive stocks tend to be high-beta stocks and cheaper stocks may be lower beta, so in a market correction, the high-beta, expensive names may go down a lot harder.
To some extent, lower valuations may reflect more cyclicality, lower credit risk / lower balance sheet quality too so you have to be a little careful. In a financial crisis-like situation, lower valuation (lower credit quality) can tank and some higher valuation names may hold up (like the FANG-like stocks).
But Greenblatt's screen is not just raw P/E or P/B, but is tied to return on capital, so maybe this is not as much of an issue compared to a pure P/B model.
The argument for this structure is that people can't stay with a strategy if it can't keep up with the market. Here, the market return is built in from the beginning and you just hope for the "Plus" part to kick in. In a long/short portfolio, the beta is netted out to a large extent so can lower potential returns. This fixes that. But there is a cost to that.
In any case, I do think it's a really interesting product, but keep in mind that it is a little riskier than Gotham's other offerings.
Oh, and go read the article on why this new fund is a good idea. Greenblatt is always a great read.
Chipotle (CMG) Well, Chipotle earnings came out and it was predictably horrible. The stock is not cheap so it hasn't been recommendable in a while, but I really like the company. There was a really long article on them recently which was a great read. It didn't really change my view of them all that much. I think they will get a lot of business back, eventually.
The earnings call was OK, but what was depressing about it was that they decided to ditch Shophouse. I don't think any analysts asked about it so it was a given, I guess. I had it a couple of times in DC and liked it and was looking forward to it in NY, but I guess that's not going to happen. As an investor, that was not baked into the cake, I don't think, even though there was probably some hope that the CMG brand can be extended into other categories.
This puts a lot of doubt into that idea. Someone said that brand extensions in restaurants/retail never work, and that has proven to be the case here. I wouldn't get too excited about pizza and burgers either. Burgers are really crowded now and will only get more so.
If CMG has to look to Europe for growth, that is not so great either as the record of U.S. companies expanding into Europe is not good. I would not count on Europe growth.
Anyway, this doesn't mean it's all over for CMG. I think they will come back, but there are some serious headwinds now other than their food poisoning problem; more competition etc. They were the only game in town for a while, but now everyone seemingly wants to become the next Chipotle, so there are a lot of options out there now.
As for Ackman's interest in CMG, I have no idea what his plan is. There is no real estate here as CMG rents all their restaurants, and their restaurants had high 20's operating margins at their peak. I don't know if they will ever get back up there, but it's not like these guys don't know how to run an efficient operation. Maybe Ackman sees SGA opportunities, but pre-crisis, SGA was less than 7%, so there wouldn't be that much of a boost from cutting SGA. Or maybe he thinks it's time for CMG to do what everyone else is doing and go for the franchise model. Who knows? I look forward to seeing what his thoughts are; hopefully some 500 page presentation pops up somewhere...
McDonalds I don't want to turn this into a food blog, but I can't resist mentioning this. I have been a lifelong MCD customer; I have no problem with it. OK, it may not be my first choice of a meal in most cases, but it's fine. And when you have a kid, you tend to go more often that you'd like. But still, it's OK. It is what it is, right?
I like the remodelling that they are doing, and the fact that they have free wifi is great too. But here's a big clustermuck they had with their recent custom burger and kiosk idea. I walked into a MCD without knowing anything about any of this recently. A lady said I can order at the kiosk and I said, no, I'll just go to the counter, thank you.
And I waited 10 minutes or so in line, looking up at the tasty looking special hamburgers on the HD, LCD menu board. It was finally my turn at the cash register and I said I want that tasty looking hamburger up there on the screen. And the lady said, oh, you can only order that at the kiosk. I was like, huh? That was really annoying. So I wait all this time and I can't get what I want; I have to walk all the way back and get in another line again? Come on! At that point, I didn't want any other burger so I just ordered a salad (and the usual for my kid).
OK, so it's my fault, probably. User error. But as a service company, as far as I'm concerned, that was a massive fail on the part of MCD.
OK, Now That I started... And by the way, since I got myself started, let me get these two out too. Yes, I spend too much time at fast food joints. Guilty. But still, here are my two peeves related to two of my favorite fast casual places:
Shake Shack: Being dragged there all the time, I have learned to love the Shack-cago hot dog. Chicken Shack is awesome too, in case you don't want to eat hamburgers all the time. But I can't tell you how often they get take-out and stay wrong. I had a long run where they didn't get it right at all and had to ask for things to be packed to go. It is really annoying and wastes everyone's time.
Chipotle: This hasn't happened to me the last couple of times, but this is the usual conversation that happens to me just about every time I go to Chipotle.
CMG: "Hi, what can we get you today?" (or some such) Me: "Um, I'll have a burrito..." CMG: putting the tortilla in the tortilla warmecooker, "and would you like white rice or brown rice? Me: "White rice is fine" CMG: with tortilla still in the cooker, "and black beans or pinto beans?" Me: "black beans". CMG: laying a sheet of aluminum foil on the counter and placing the tortilla on it, moving over to the rice area, "Was that white rice or brown rice?" Me: "white rice" CMG: sliding over to the beans, "and black beans or pinto beans?". Me: "black".
I can't tell you how many times this exact thing happened to me. If you can't remember what I say, don't ask beforehand! Just ask when we get to whatever you are going to ask me about! This is not rocket science, lol... Incredibly annoying.
Anyway, I still love CMG and will keep eating there.
Oh, and to make things interesting, I decided to post a contact email address in the "about" section of the blog. I will try to respond to every email, but keep in mind I may not look in that email box all the time.
I will try to post more, though.
http://brooklyninvestor.blogspot.com/2016/11/perpetual-option-och-ziff-capital.html (read original with tables)
submitted by BobFine to stocks [link] [comments]

With many spread betting firms you can have pips in GBP. Assuming I am fully understanding everything, This theoretically creates a "risk free" arbitrage opportunity. Let me explain: Short Description: Arbitrage involves simultaneously buying and selling a security at two different prices in two different markets, with the aim of making a profit without the risk of prices fluctuating. All You Need to Know About Arbitrage. Today’s financial markets are interconnected like never before. Investors can buy and sell financial instruments all over the world, literally in a Arbitrage. Arbitrage is definitely not for beginners and it requires you to have accounts at several spread betting firms. It is basically a technique where you can make risk free profits from the trades that you make by taking advantage of the difference in prices between the spread betting firms. Risk Free Arbitrage with Spread Betting? Credit to Peter Marsden. I noticed a while ago spread betting companies let you buy and sell currency pairs and many of them allow you to select which currency you want to use for each pip value. For example if you open a long position in GBP/USD pip values with a normal broker would be in USD. The way arbitrage spread betting is done is basically choosing a specific bet, if we take financial spread betting for the example and we choose the oil price as the bet type and we choose 2 financial spread betting services: Service A: Offers a spread of 69 – 72 as the oil price (in USD).

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