That Was The Week:
So, we saw some more down moves, and perhaps a little more worrying, the US bond yields tumbling. Bond buyers are out in force. Risk off, as they say. Our week was shortened with public holidays as the month of May played the predictable role- ‘Sell in May’ a 3.46% decline
As we have no ‘skin in the game’ regarding direction, we are just happy to see moves. I need to qualify this. The market overprices risk usually- implied volatility will always, therefore, be greater than historical vol. Analysts have an impossible job of estimating the future. Thus we are gifted the prices, and can choose to buy/sell based on the assessment from someone smarter than us! (Surely smarter than me, at any rate). Sounds so easy doesn’t it?
MMT Modern Monetary Theory
My understanding is in essence that debt doesn’t matter-here’s a chart that makes sense of that:
Readers may not find it crystal clear so I apologise, this is borrowed from Hoisington (via John Mauldin). The upshot is that we have borrowed more to avoid recession. We have borrowed more to ensure ‘strong and stable’ growth. We have not borrowed more because it’s free- who would even contemplate such a thing? Nations issuing public debt have had a great time as inflation ensures interest rates are effectively negative.
Why would you buy this debt? Because it’s zero risk of default and good chance of capital growth, even though yields are terrible. This is a game that can go on ‘almost’ forever. When a bond comes to the end of its term you pay back the initial capital. Interest only mortgage? Same thing. Except it’s not actually a mortgage, due to the total lack of amortisation. But……..
You can borrow against a bond- use it as margin. Bonds make good sense for any institution holding cash. Even better if you can print your own cash- not the Frank Abagnale, Jr kind of cash!*
The Game’s Afoot
Debt is so ingrained, but it’s not so long ago that Barclaycard launched-1966 with a limit of £100 or £200. OK- it’s 50 years, but it’s the blink of an eye in the history of financial transactions.
Just see how well it’s doing:
Personal debt in the UK is now around £1.6 trillion https://www.moneyexpert.com/debt/uk-personal-debt-levels-continue-rise/
Now debt really does matter when it’s personal. Interest rates as we know can be mind numbing-multiples of hundreds of % for those dodgy daytime TV loan shar companies. Borrowers’ problems arise when using these ‘resources’ to service other (often cheaper) debt. Typically it takes just months before debt is unmanageable. Our G7 nations can easily service their debt, and issue new debt when old bonds become due. So where are we now? Personal debt is a problem, the consumer is needed to keep spending. I’m now getting emails predicting recession/no recession. Confusing it is. Ramble over, but bear the above in mind.
The Options Bit- Our Running trades- 132 Update
We bought the 7200 put(50.5) and sold two of the 7000 puts(20.5) for June Expiry. We liked it last week when it was 13, (we doubled our stake here) this week it’s 27.5. Our median buy price therefore 11.5. Exit or stick with it? Sell a few so we’re in a cost free trade? Choices choices-it’s why exit is everything.
Trade 133 Update
Our strangle – now 11 (10 for the 6700 put and 1 for the 7550 call) Originally:
Sell 7550 call for 8, 6700 put for 9.5. Reality check- margin of say £1500 you collect (8+9.5=17) £170 Expiry in 28 days,risk at 7567, and 6683
We’re trading 10 lots of Trade 132. 20 lots of Trade 133. Therefore margin now cranked up to say £50k, so it may resonate with those looking to step up in size.
Trade134- When We have no margin Left
We have used margin- about £50k to date so let’s get honest, and place a trade requiring no margin.
Can you tell what it is yet? A call butterfly – a debit trade costing 122+27- (64.5×2)=20. Readers, we thus have no need of margin- it is a combination of a short (7200/7300) spread and a long (7100/7200) spread. We sell the body x2 – the middle strike, at 7200 and buy the wings, 7100,7300. Our max risk limited to the 20 we paid, max profit 100 minus our 20. Logic of the trade? I ‘believe’ that 7200 is support, 7300 has been rejected more or less. Just my own view. Readers, FTSE expiry at 7200 is our ideal but looking at the Greeks, Theta is working for us (0.4379 )……….. in a small way.
* Catch Me If You Can- 2002 film with Leonardo de Caprio – well worth a watch
