All posts by 30DayTrading

Halifax Houses Market Data

We have in the last 4 years been involved in buying Nova Scotia real estate and we’ve had to analyse the market to look for criteria we wanted. However we found the real estate broker websites in the Nova Scotia area generally did not good market overviews like absorption weeks and overall property inventory numbers.Therefore we felt we need to write our own Halifax Houses Market Data tool to quickly visualise and compare market trends.

The previous Real Estate Market Data Visualisation Tool was written about 3 years ago for locating individual properties for potential purchases. Now that we have some properties, the new Halifax Houses Market Data tool was developed in 2019. This new tool is for reviewing general trends and market analysis, so we can monitor the existing property investments.

So how do you use Halifax Houses Market Data tool ?

The tool instructions are relatively straightforward:

Halifax Houses Market Data tool - Halifax Nova Scotia - Instructions - 20191010

1. Select vertical axis with one of the many market data variables available.
2. Optionally select the horizontal axis with a market data variables, but for most cases it is simply better to maintain “Statistics Date” settings to get a time based chart. If you want to do scatter plot to see data correlations between two variables, then it can be useful to select something other than “Statistics Date” for the horizontal axis. However generally maintaining “Statistics Date” is better to keep a time series.
3. Move mouse over chart data points – left hand side is 2011 and right hand side is now. A tooltip popup will give you the “Statistics Date” for that data point. The vertical axis gives the value ranges for the selected market data variable and the actual value is given below in the market data pane (beneath the select boxes). The chart always plots the selected vertical market data variable against the selected horizontal market data variable.
4. View the market data pane to see all variables for that date. The market data view changes dynamically as mouse moves over different chart data points. Each data point on the chart represent a date has all the market data variables that appear in the market data pane. The two selected axis variables are highlighted on the market data, so it can be easily seen what is selected when moving the mouse over the chart data points.
5. Repeat from point 1 for different market data variables.

The tool can be quickly used to identify long term yearly trends in the market, hopefully to predict best times to buy and estimate future market direction.

Low absorption rate

Absorption rate is the amount of time it would take for all open listings to be purchased (assuming no further listing were added). The absorption rate calculation here is defined as the total number of available homes divided the average number of sales per week. The absorption rate is a number of weeks, specifically the number of weeks it would take for all current housing inventory to be exhausted.

This screenshot shows how the market absorption rate (in weeks) typically moves in a predictable seasonal range with lows in the summer (less houses available) and highs in the winter (more houses available).

Halifax Houses Market Data tool - Halifax Nova Scotia - Absorption Rate Weeks - 20191010

From 2012 to approximately end of 2016 absorption rate went with seasonal moves, from average lows of about 40 weeks, to winter highs of on average about 60 weeks. This pattern repeated each winter from 2012 to 2016, even though there were some 2014 data points with some very significant highs around 100 weeks. Some of the 2014 data points maybe “bad” data points, but the take away is that there was a huge amount of unsold inventory on the market at the time.

However at the end of 2016 absorption rate started a downward trend that is still continuing. The absorption rate has declined with usual seasonal patterns, but importantly seems to be trending lower every year. This would indicate that market conditions are a lot tighter now, with a houses being purchased quicker so that it reduces available market inventory. A faster absorption rate often reduces the amount of quality houses for a buyer, simply because the demand picks off the better priced deals first. From a final high of 65 weeks at the end of 2016 the absorption rate has declined to a low of 17 weeks in Oct 2019. To put this another way – Halifax housing inventory would be exhausted 3 times as quickly in 2019 compared to only 3 years ago. This implies a significant move from a buyers market to a sellers market.

Active Listing for Single Family

Halifax houses market data has been separated into a single family category (removing condos and vacant land) because that is our target property for rentals. This can include multi family up to four units. This deliberately excludes condos, because on average the monthly charges on condos make then inefficient rentals.

The screenshot below shows the number of active listings for single family homes from 2011 to now.

Halifax Houses Market Data tool - Halifax Nova Scotia - Listing Active Total Singlefamily - 20191010

The number of active listing for single family homes has peaked from a high of approx 4,000 in mid 2015 to a low of approx 1,500 in Oct 2019. This would indicate that market conditions are a lot tighter now, with a reduced amount of single family houses to choose from. Similar to absorption rate, this implies a sellers market in Oct 2019.

Data Integrity

Most variables are available from approximately July 2011 to present dates. Some data points for some variables are missing from 2011 to approximately 2013, so there maybe incomplete data points with blank chart data points during those time ranges. Occasionally data points are obvious outliers that can be ignored if they appear way below or above the usual chart curve. The aim of the tool is to look for trends, not get the data absolutely perfect.

Emerging Markets Iron Condor

This is another bread and butter trade with an emerging markets iron condor, going out a bit further in time to October with 78 days to expiration (DTE). Emerging Markets ETF EEM has sold off rapidly due to market tariff and rate cut talk this week, which has provided inflated volatiliy. This is a limited risk range bound trade for EEM with the expectation that the market maintains its position over the next two months and that volatility contracts.

Trade entry Emerging Markets Iron Condor

Here is the trade entry for EEM iron condor:


Contracts  Expiry Date  Strike   Price   Amount   Trade
-------------------------------------------------------------
+5         Oct 18 2019  45.00  C $0.05   $ 52.69  Buy to Open
-5         Oct 18 2019  42.00  C $0.74  -$372.25  Sell to Open
-5         Oct 18 2019  38.50  P $0.76  -$317.20  Sell to Open
+5         Oct 18 2019  35.50  P $0.35   $122.79  Buy to Open
-------------------------------------------------------------
Total    	                        -$513.97 (credit)

On trade entry on 2nd August there were 78 Days to expiration DTE through to option expiration on 18th Oct. According to the 30 day rule this means that can consider exiting the trade on or after 2nd Sept. On 2nd Sept this would still leave approximately 48 calendar DTE, so there is plenty of time to adjust or exit. The following table sounds the future trade lifecycle dates when trade exit or trade adjustments could be optionally applied:

Trade Lifecycle for EEM Iron Condor

Trade DateTrade Lifecycle (Optional)Days to Expiration
(DTE)
2nd August 2019Trade Entry - enter Iron Condor according to original trade above78
2nd September 2019(Trade Exit) - optional earliest possible date for a full trade exit according to 30 day rule.48 to 1
13th September 2019(Trade Adjustment) - latest possible date to do a trade adjustment using the same Oct options (trade adjustments must be at least 30 DTE)78 to 30
18th October 2019Trade Exit - latest possible date to exit original Iron Condor with any optional trade adjustments that were added.1
Note: Trade Lifecycle actions that are optional are in brackets like this (Trade Adjustment) or (Trade Exit).

The option deltas sold on each side are approximately 35% on the call and 25% on the put, so there is approximately a 70% chance that the call will be touched, and a 50% chance that the put will be touched anytime between now and Oct expiration. Therefore it is likely that the short options at $42 and $38.5 will be tested at some point on this trade, but it can be held due to the limited risk. The breakeven points of $43 and $37.5 are at the high and low ends respectively of the trading range price action for the last year, so we can be reasonably confident that at some point in the next couple of months EEM could return to the the middle of this range – even if there is likely to be some short term volatility, possibly with the short options being touched.

Trade Summary

The aim will be to close the trade for a $100 to $250 profit after 30 calendar days have elapsed, but this could require being patient and waiting for volatility to come in a bit and the trade to move back into the middle of the range around the $40 mark.

Mexican Bearish Put Butterfly

This trade idea is a trade adjustment to a currently open bearish trade on the Mexican Market ETF (EWW). The strategy ultimately converts the existing bearish diagonal spread into a bearish Put Butterfly.

Trade Update for 30 July 2019

A trading update on July 30, 2019 shows that the ETF has brought the speaking been in a range for the majority of the month around the $42 mark. However with the federal reserve rate cut announcement there was a drop off on the afternoon of 30 July that has caused for the ETF to move down beneath the $42 strike in August. This means that the August short put is now ITM and needs to be managed accordingly however this is being fully offset by the $43 port in the September cycle. The aim here would be to maintain the position slightly closer to expiration to allow any time premium to drain out of the August cycle, and then either close the position or do a short put roll into September.

The rolling options are to either roll the $40 put into either a $41 or lower put to maintain the bearish position into Sept 2019. Alternatively the put could be rolled to create a September butterfly by selling twice as many puts and adding a down side put for protection. This would create a butterfly that can be held into September expiration. Ideally this would be done into a higher volatility environment to get as much juice as possible into the September options.

Long Mexican EWW Bearish Put Diagonal Calendar Spread - Trade Update Chart - 20190731

The position has approximately $120 profit and long as the etf stays under the $42 level this profit is not at risk. The 30 day calendar period has elapsed so the position can be closed or adjusted anytime. Therefore position can be maintained for a few extra trading days and monitored for a good Time to roll into September once even more time value has drained out of the August short put. Currently there is still approximately $0.50 time value (or about $300) left in the August short put, so this is a potential time profit that can still be extracted from the position.
Ultimately no adjustment was done today.

Trade Update for 1 August 2019

On 1st August 2019 in afternoon trading the Trump administration announced more tariffs against China. This somewhat spooked the markets triggering a fairly swift sell off in markets especially those effected by tariffs. This meant that the August short put at $42 has gone significantly ITM. With Mexican ETF EWW trading at approximately $40.75 the put had only about $0.20 extrinsic value, so it was a good candidate for rolling.

The sell off generated increased volatility in a short amount of time and ATM put premium in September looks quite attractive to roll into. This was an opportunistic trade due to the swift selloff, so the decision was taken to convert the position to buy September butterfly.

The August $42 put was brought back (buy to close) for a $450.71 loss, and was replaced with 12 contracts of $41 puts sold to open in September, followed by 6 contracts of $39 puts bought to open. The existing $43 put in September was maintained and not changed as part of the position. This converted the entire position into a $43/$41/$39 September butterfly. The entire new position result in a $288.67 credit, so the most that can be lost on the trade is now -$450.71 (from the losing $42 august option roll) plus the $288.67 credit received for Sept butterfly – so max position risk is now only $162.04. This roll was all completed in one trade ticket with one set of commissions.

This table gives the new position below. The top two options rows are option roll described above. The last option row is not a new position, but simply maintaining the original long $43 put from the original trade entry.

 
Trade Date
Category
Trans Type
Description
Symbol
Quantity
Price
Amount
01-Aug-2019
Income
Buy to Open Long Put
Put  EWW  39.00 EXP 20-Sept-2019
EWW190920P39.0
6.0
0.66
-$393.35

01-Aug-2019
Income
Sell to Open Short Put
Put EWW  41.00 EXP 20-Sep-2019
EWW190920P41.0
-12.0
1.33
$1,596.32

01-Aug-2019
Income
Buy to Open Long Put
Put EWW  43.00 EXP 20-Sep-2019
EWW190920P43.0
6.0
1.52
-$914.30

TOTAL
-$288.67

<![if IE]><![endif]>

 

This roll exchanged approximately $0.20 of time value in the August cycle for approximately $2.00 time value remaining in the September cycle. If there is a large move either way over for example $43 or $39 then the maximum amount will likely be lost. The optimum trade scenario would be to close around $41 at September expiration. Because the trade is a butterfly trade it will benefit from a decrease in volatility and from the waiting until expiration. Given the low risk in this trade it would be fine to wait until very close to September expiration. Even if Mexican ETF EWW moves around a lot there will likely not a significant profit/loss changes until closer to expiration.

Summary of Mexican bearish put diagonal spread (converted to butterfly)

The Mexican ETF EWW will likely be volatile over the next week or two and may well move outside the ideally trading range of $39 to $43. But the approximate $41 target for September is on the low-end of the historical trading range for the last six months (a historical support line) so it is possible that becomes resistance with a move down in August and subsequent rally back up in September. However the trade will be held and re-evaluated in 30 calendar days - basically a low risk trade waiting for lower volatility and getting closer to September expiration.

Trading Gold Long Term Diagonal Spreads

This trade idea shows how to approach trading gold with long term diagonal spreads. The trade example shows how a bullish multi month GLD long call diagonal spread was entered and managed. This trade was IRA eligible so using multiple option legs does not generate lots of complex tax reporting, and there was no issue of paying extra capital gains if the trade is ultimately successful.

Gold market and GLD volatility overview

In March 2019 FED was signaling a rate pause which could be bullish for gold prices. This is an example of using options to express a “long gold” opinion in a portfolio, in this case using the physical Gold precious metal ETF (GLD)

In March 2019 Gold volatility was approximately 9%, which was in the lower quartile (lowest 25%) for the last six months – having had a range of approximately 12% in Dec 2018, down to 8.5% in Feb 2019. Low volatility generally makes a better trade entry for long term calendar diagonal spreads. Importantly saying that “the volatility is cheap” only means relative to its own recent history in the last few months for this particular ETF or commodity. This does not mean that the underlying will not move around, because trading gold is historical volatile. This only means that the debit on trade entry is cheaper, simply as you don’t pay as much option time premium for the longer dated call (because the market is currently pricing less of an expected move by Sept 2019).
The chart below shows the GLD volatility chart for several months before and after trade entry on 22nd March 2019.

GLD July 2019 1 year volatility chart
trading gold - Long GLD Diagonal Calendar Spread - Volatility chart with Popup Balloon - 20190729

Trade Entry in March 2019

Having made a decision to long gold for 2019, the next step is to structure a suitable risk/reward trade within the 30 day rule. Here is the original trade entry when GLD closed at $123.97 on 22nd March 2019:

 
Trade Date
Category
Trans Type
Description
Symbol
Quantity
Price
Amount
22-Mar-2019
Portfolio
Sell to Open Short Call
Call GLD 128.00  EXP 17-May-2019
GLD190517C128
-6.0
0.77
$464.65

22-Mar-2019
Portfolio
Buy to Open Long Call
Call GLD 128.00  EXP 20-Sep-2019
GLD190920C128
6.0
2.70
-$1,622.29

TOTAL
$ 1157.64

<![if IE]><![endif]>

 

This trade was OTM so had approximately a 30% of being ITM at expiration - it was therefore a lower probability trade, but high conviction portfolio position ("long gold for next 6 months"). Losing the entire trade premium (defined at trade entry) was acceptable risk for the overall portfolio - but the payoff was potentially large for the relatively small initial risk, so it created the right risk profile to express the trade idea. Initially selling the shorter dated call help finance the longer dated call, and reduce the overall risk in the position. The intent is to avoid this shorter call being assigned and roll it multiple times over the summer to gradually chip away at the premium paid for the longer dated call.

Here are the main high level scenarios for the trade outcome - GLD stays in a range, goes up a lot or goes down a lot (just about covered all scenarios in finance there!):

If gold stays the same or rallies slightly towards but not through the short call, it can likely be bought back for less than it was sold for - this helps to reduce the basis on the original longer dated option. If this can be done over a few months rolling option calls can nicely reduce the basis on the original longer dated option. Usually selling the 30 delta OTM call is a decent starting strategy initially, but once the position basis is reduced then selling calls that are more than 30 delta OTM is ok.

If gold rallies strongly in the next month, it maybe difficult to roll the short call at a profit. This is a risk of the calendar spread strategy - the market call is "right" but gold rallies too fast, and the position makes little money. This happens because the negative delta of the short call becomes similar to the positive delta of the longer dated call - so the overall position can become delta neutral or even negative delta (short underlying) in a strong rally. On average though the short call can be managed with month to month adjustments.

If gold tanks in the next month, it maybe difficult to roll the short call to get any reasonable premium in the same strike in the next month. However if any premium is available in the next month call, then it can be sold at the same strike. In the situation where gold goes down, one luxury of any calendar spread strategy is to simply sit on the trade and hope it comes back. This is "ok" as a strategy with calendar spreads because the limited risk was defined at order entry.

Trade Adjustment in May 2019

The trade adjustment that was chosen in the end, was to let short call expire worthless and simply hold the longer dated Sept 2019 call option. This has keeps the trade risk to approximately $1150 but there is still now no upside cap and still plenty of time for the trade thesis to play out. The trade is now $464 better off than if we had just bought the long dated call for $1622. Sometimes doing nothing can be the best option.

Option Skew in July 2019

As of 29th July, the Sept 2019 Option premiums are indicating that the market is pricing in significantly more upside than downside for gold in the next 7 weeks. Looking at the option chain below shows the distance of both 30 delta OTM put and call options from the underlying GLD price.
trading gold - Long GLD Diagonal Calendar Spread - Option Chain Skew Sept 2019 - 20190729

GLD is traded at $134.53 as of the NY close on 29th July 2019. Going 53 days to expiration on the Sept 2019 option chain, shows that the $139 call (with a delta of 0.2998) has approximately the same delta of the $132 put (with a delta of 0.2963). This means that market is assigning the 30% probability that GLD is $4.50 higher by Sept 20th 2019 expiration and a 30% probability that is $2.50 lower. That appears to be a huge bullish skew indicating that the market is still expecting higher prices in the medium term - despite the recent rally. If that bullish skew starts to disappear in the next few days, then would consider closing the long position, but for now content to hold until closer to expiration - especially because the option position only has a relatively small amount of remaining extrinsic value (time premium).

Specifically the extrinsic value (time premium) on our long dated call option is only approximately $0.65, with the majority being intrinsic value. Extrinsic value was calculated by adding the mean bid/ask for the option price ($7.175) to the option strike ($128), then subtracting the actual GLD market price ($134.53) = approximately $0.645.

Importantly this now means that the option delta is over 90%, so the position is trading like a stock position in the underlying. Since 6 calls $128 Sept 2019 are held, that representing a 6 x 100 x option delta = 600 shares x 0.9088 position = approximately equivalent to a 545 GLD share position. That represents a notional position of approximately 545 share equivalent x $134.53 = $73,318. There are some slippage in option bid/ask spreads and the option will move as GLD moves around - but that does give a good approximation of the current position size.

Trade Update in July 2019

This is the current GLD price as of 29th July 2019, and the position has made nice progress after the trade entry on 22nd March 2019:
trading gold - Long GLD Diagonal Calendar Spread - Price chart - 20190729

The current unrealised gain loss on the Sept 2019 call position $2727, added to the $454 from May 2019 expired call, gives a total gain for the overall position of approximately $3181. This is approximately a 276% return on capital so far.

These are some possible exit strategies as the option call is getting closer to Sept 20th 2019 expiration date:

Exit long dated call at a profit - simplest technique, but does not maintain any portfolio gold exposure which will likely be a good idea in a rate lowering environment. This can be done by either just simply selling the call, or by selling dated Sept 2018 ATM calls and hoping to deliberately get called away.

Roll long dated call up and out to a higher strike - this will depend if volatility is still high (over 10%) then this would be an expensive trade. Specifically because if the long option is significantly ITM and getting closer to expiration date (Sept 2019) - it will not have a lot of time premium left in it. Rolling the call up to several months out further out will likely incur some higher than desired premium (due to the high volatility environment). However rolling out could remove all risk from the position (if done for a $1150 credit) and would maintain a multi month GLD position into 2020.

Sell long date call, and switch to using "high volatility" strategy to maintain a long gold position - e.g. bull put spread

Summary of trading gold with long term diagonal spreads

In summary on 29th July the call option position represents an equivalent $73,318 long GLD position, that was acquired with about $1150 of risk. With this strategy there was initially a 30% chance of GLD finishing in the money above $128 by expiration (based on the option delta). The probability of a touch is defined as double the initial option delta - so that also means that over the trade lifecycle there is a approximately a 60% probability of GLD touching $128. To word that in a different way it means that at some point between Mar and Sept 2019 in all likelihood there will be about a 60% possibility of taking at least some profit from the trade. Additionally because we thought GLD would go up in 2019, then we also are thinking that the stated probability was under priced. That meant that using our bullish opinion on trading gold from the macro fundamentals has given us the opportunity to put the odds on our side.

Importantly this wasn't just like a lottery ticket style infomercial that says "I make 500% a week buying options" - where the stated returns are often from buying lottery ticket way OTM options that only make that "big" money occasionally, but on average is a losing option strategy. In summary the GLD strategy had:

  • a defined theoretical probability in advance
  • limited risk/reward
  • time for the investment idea to play out

This trade shows the power of option leverage, and why it is always a good idea to structure your portfolio to respect it - even if we just happen to be on the right side of it this time. This trade is still ongoing so no decision has been made yet, however it shows how to get to good risk adjusted returns using a relatively small amount of capital.

Mexican Bearish Put Diagonal Spread

This trade idea shows how to approach trading the Mexican Market ETF (EWW) with a slightly bearish bias. If EWW maintains its position or goes down slightly over the next month, then this position is likely a winner. The strategy will only make a limited amount of money if a large sustained selloff occurs immediately. The only main directional risk to the trade is a large rally higher. This trade was IRA eligible so using multiple option legs does not generate lots of complex tax reporting, and there was no issue of paying extra capital gains if the trade is ultimately successful.

Mexican market and volatility overview

Mexico has been in the news recently due to a lot of tariff talk. This has meant that the Mexican stock market has been trending down since April 2019. EWW has had a high of $47.18 in April 2019 and a low of $41.77 in March 2019. For the majority of 2019 the ETF has been in this trading range between approximately $42 and $47. This relatively confined range and lower volatility makes it a good candidate for a diagonal spread. The trend since April 2019 has been slow ping gradually down so rather than buck the trend we can enter a slightly bearish put calendar spread to take advantage of any ongoing minor sell off.

Mexican Bearish Put Diagonal Spread- Trade Entry Chart - 20190628

The volatility chart for the last year shows a very wide range of implied volatility there was a huge spike up to approximately 43% in December 2018 when the tarriff talk was at its height. They implied volatility has moved down a lot since then six months later and by the end of June 2019 is approximately 18% which is one of the lowest readings for the year. Therefore it is a good relative volatility level to enter a put diagonal spread that will benefit if volatility increases. We can continue to express a slightly bearish opinion without over paying on trade entry for option premium.

Short EWW Bearish Put Diagonal Calendar Spread - Volatility chart - 20190628

Mexican ETF Trade Entry in June 2019

The trade entry was on 28th of June 2019 as shown in the trade below:

 
Trade Date
Category
Trans Type
Description
Symbol
Quantity
Price
Amount
28-Jun-2019
Income
Buy to Open Long Put
Put EWW 39.00  EXP 20-Sep-2019
EWW190816P42
-6.0
0.72
$434.64

28-Jun-2019
Income
Buy to Open Long Call
Call EWW 43.00  EXP 20-Sep-2019
EWW190920P43
6.0
1.52
-$914.30

TOTAL
$ 479.66

<![if IE]><![endif]>

 

Summary of Mexican bearish put diagonal spread

This trade was OTM so had approximately a 40% of being ITM at expiration - it was therefore a lower probability trade. Initially selling the shorter dated put help finance the longer dated put, and reduce the overall risk in the position. The Mexican ETF EWW will hopefully drift lower over July without any major move either way.

Run your own fixed income annuity

Fixed Income Annuity - 19th Century Book - 20200504

Sometimes you just want to make the guaranteed risk return with the possibility of some upside, but with a guaranteed return of principal. This is typically where fixed annuities come in, however they can be expensive with up front load or annual management fees. Fixed annuities can also be structured in an opaque way where it is not clear exactly what investments the product has bought and how they are managed (e.g. trade turnover etc) – in short they are not very transparent.

Please note: A fixed income annuity is a very complex contract between you and the insurance company. Therefore it is not perfectly compared with the actual investments described in this blog – but this is a starting point to see if the flexibility of doing it yourself might give you some more transparency.

So … is it even possible to run your own fixed income annuity style investment ? Preferably with minimal management, without all the fees and long lock up periods. This blog post is a look back at an annuity style strategy that has been executed for the last few months.

Lets assume we’d like to do this with a lump sum principal of $100,000 USD. It is pretty easy to create medium term US treasury portfolio which is close to the risk free return – lets assume we can construct an equal weighted multi year duration portfolio of treasuries up to 5 years out. Technically there is some duration risk on the longer dated treasuries, but it’s decent proxy for a stable risk free return portfolio. A few months ago in Feb 2019 this had a blended rate of approximately 2.5% – yielding about $2500 a year in interest. See this table for the basic treasury portfolio construction:

Price DateUS Treasury DurationUS Treasury Yield (annualised)Principal AmountYield Amount (annualised)
13th-Feb-20196 months2.51$20,000$502
13th-Feb-20191 year2.55$20,000$510
13th-Feb-20192 years2.53$20,000$506
13th-Feb-20193 years2.52$20,000$504
13th-Feb-20195 years2.53$20,000$506
TOTALS$100,000$2,528
See prices from US Government Treasury website

Managing interest rate risk

However over the next few years, rates might go up or they could be cut. Ideally when each treasury expires we’d like to be able to roll into a new treasury bond with a similar or higher interest rate. However by the time that happens the interest rate market could have moved. So how to manage that interest rate risk without risking any principal?

Since Bond prices will increase when interest rates go down some hedge needs to be provided against falling rates. More simply – something that makes money when rates go down.

In March 2019 we started adding to the above treasury portfolio, by using limited risk bullish short put spread in TLT options. In theory TLT should go up if FED was to cut interest rates and go down if rates rise. TLT contains bonds that have an approximate 17.8 year bond duration, so it is not a perfect proxy for own mini fixed income portfolio that has an average duration of about 2.5 years – however it should be correlated at least. Plus TLT does have very liquid options market that is a couple of pennies wide and can often get filled at mid price, so we can be confident of getting liquid fills on the option trades.

This TLT “short interest rates” trade can be done fairly simply using an ATM bullish put spread, with a slight time decay in your favour on trade entry. There appears to nearly always be a small amount of extrinsic value in an ATM put spread appears to be consistently available, because TLT itself has an actual yield – so you would expect to get paid something for holding it for 90 days even if (all other things being equal) the price never moved. For example if the market is $125, you can sell 5 contracts of $126 put and buy 5 contracts $124 put 90 days out for a credit of $1.05. That would give approximately $0.05 of extrinsic value with $1.00 of instrinic value. If TLT rallies over $126 by expiration can make $550 for that quarter, if it closes below $124 lose $450 for that quarter. Obviously if rolling the put options is considered this becomes way more complex, but waiting to close until near expiration is the simplest case.

If you want to replicate a true fixed annuity with no risk to principal, you’d have to be careful size each trade to not risk too much on each TLT put spread. Lets assume we will do one put spread per quarter, and risk $500 per quarter per spread – that would mean in theory we could lose $2000 ($500 x 4 quarters) on the spreads. However since we gain $2500 in treasury interest, so we’d still be $500 ahead for the year. Not great obviously, but that is the theoretical worse case scenario and if we want guarantee to maintain principal then we have to be cautious with the risk. This is an annuity strategy where aim is to take some market risk but only with money gained from interest payments, never from the principal.
If you wanted to take equity risk as well, this could be applied using SPY option spreads, but recognize that is obviously not as tightly correlated to US treasury rates as TLT.
If you did lose money on the TLT spread, that would be an advantage to you when you come to re-invest any expiring fixed income, because the treasury rates would be higher.

To clarify the idea here are a couple of actual trades to show the principal. One is a simple bullish put spread. The second one was a combination of bullish put spread with a bearish short call spread sold against it.

TLT bullish put spread

This trade was entered into in March 2019, then exited closer to May 2019 expiration on 1st May. There was a $369 profit as TLT had traded up slightly. This took approximately 50% of available profit.

 
Trade Date
Category
Trans Type
Description
Symbol
Quantity
Price
Amount
21-March-2019
Hedging
Buy to Open Long Put
Put TLT 121.00  EXP 17-May-2019
TLT190517P121
5.0
0.88
$434.64

21-March-2019
Hedging
Sell to Open Short Put
Put TLT 124.00  EXP 17-May-2019
TLT190517P124
-5.0
2.36
-$1,182.24

TOTAL
-$ 747.60

 

TLT bullish put spread with bearish call spread

A couple of days later on 3rd May a similar bullish put spread trade was opened June options, but this had an overwrite with a call spread to give the trade some option premium to sell. Normally trades would be rolled the same day, but there was a couple days in between trades because the earlier trade was trigger by a limit order (and didn't notice position was exited).

 
Trade Date
Category
Trans Type
Description
Symbol
Quantity
Price
Amount
01-May-2019
Hedging
Buy to Open Long Put
Put TLT 121 EXP 21-Jun-2019
TLT190621P121
4.0
0.49
$194.24

01-May-2019
Hedging
Sell to Open Short Put
Put TLT 125 EXP 21-Jun-2019
TLT190621P125
-4.0
2.24
-$896.79

01-May-2019
Hedging
Sell to Open Short Call
Call TLT 126 EXP 21-Jun-2019
TLT190621C126
-4.0
0.60
-$241.75

01-May-2019
Hedging
Buy to Open Long Call
Call TLT 127 EXP 21-Jun-2019
TLT190621C127
4.0
0.45
$178.24

TOTAL
-$ 766.06

 

This trade was entered into on 1st May 2019, then exited closer to June 2019 expiration on 3rd June. This holding period fits with the 30 day rule. Unfortunately selling the call spread did not help the position here as it lost $345.97. If TLT had been flat to slightly down then the call spread would have made money. Fortunately the bullish short put spread made most of the profit ($694.02) because TLT had traded up significantly higher. Exiting the bullish short put spread and bearish short call spread together as a combination though made a total profit of $348 ($694.02 - $345.97).

For reference here is an interactive price chart for TLT that can be used to see the prices from Feb 2019 to June 2019. On chart use minus (-) zoom control to zoom out, then click, hold and move mouse to the right to navigate back to 2019.

Fixed Income Annuity - Summary

This blog post showed how it is possible to take small profits out of TLT to increase yield, but with limited risk if TLT goes down. In this real life example TLT went up, so the May and June spread trades added a few hundred dollars in yield. However if TLT did go down that would be an advantage to the main US treasury principal because new bonds could be bought with higher yield to expiration. This might need some tweaking to make into a better results, but it demonstrates the idea. There is approximately 30mins monthly effort required to analysis, enter, monitor and roll the TLT spreads. Running your own "annuity" product is potentially a lot cheaper than an traditional annuity that charges upfront load fees and annual fees.

Futures Calendar Spreads on Interactive Brokers

Trading futures calendar spreads is a good way to express a long or short opinion an underlying index or commodity, without the volatility and margin requirements of a fully directional naked future contract. We are using Interactive Brokers (IB) to trade future calendar spreads, but many other future brokers offer this. Here we can review an example Natural Gas /NG bullish calendar spread, that should benefit from a rise in the commodity price. This bull future spread means long a front month future contract, and short a back month future contract.

To describe trade entry and exit on this bull future spread we will use the IB “buy” and “sell” terminology as follows:
Trade entry – means to “sell” the spread (go long front month, then short back month)
Trade exit – means to “buy” the spread (short front month and go long back month). This is the exact logical opposite of trade entry.

Futures Calendar Spreads – Demo Account

Before you place any real trades here it is highly recommended use the IB demo trading mode of Paper Trading. Click “Try the demo” link below from the IB login screen. The IB future trading interface is somewhat non intuitive and requires a reasonable learning curve to fully understand what futures positions are being represented.

Interactive Brokers Paper Trading Login - Futures Calendar Spreads

Trade Entry

Trade Entry was on 27th Feb 2018

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry

These are screenshots of entering the order from the demo system. Using the demo system for dummy order execution avoids accidental executions with “real” money. Please note that the market has moved so that the demo system screenshots do not match the above “real” trade entry executions – however the process to follow remains identical.

For some historical context, this is the 1 year chart of the spread:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry - Chart 1 Year

This is where to select the relevant menu item from the SpreadTrader utility:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry - SpreadTrader Start menu

This is how to select the front month and back month. Importantly can not select just one calendar spread, must select two or more spreads otherwise the “Finish” button does not appear.

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry - SpreadTrader Configure Futures Spreads

Click on the relevant “ask” for the calendar spread and the following order entry will appear.
As we are selling, make sure the limit price starts higher than current Ask.

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry - SpreadTrader Order Entry

Followed by this order display:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry - SpreadTrader Order Display

Walk down the limit price downwards (because we are selling) by 0.001 increments on the order until you achieve a fill.

Trade Update

This trade update was on 18th April 2018 to enter a GTC order to allow possible trade exit after the time frame for the 30 day rule has elapsed.

Identify the long future leg in the front month from the Account Positions, and select Contract Description menu:

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Long Leg

Review the contract description and note the symbol. In this case the symbol is NGM8. Verify that the futures contract named month and actual expiration date are as expected.
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Long Leg Contract Description

Repeat process for the short future leg in the back month from the Account Positions, and select Contract Description menu:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Short Leg

Review the contract description and note the symbol. In this case the symbol is NGQ8.
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Short Leg Contract Description

Now look at the chart to identify a target exit price. Create a new chart of the calendar futures spread that is the long near month contract minus the short back month contract
Cut and paste NGM8-NGQ8 into the chart symbol entry text box and press ENTER. In this example NGM8 Jun 18 is the near month and NGQ8 Aug 18 is the back month.
Important – note that the label shown on the chart is the exact OPPOSITE way to what was entered!

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Chart 2 Months

Now create limit order exit trade to Buy. Right click on the chart and select Buy and drag down the line significantly underneath the chart. Click the “T” on the order.

To exit this trade need to sell the near month (that is long Jun 18 position) and buy back the far month (that is short Aug 18 position). IB defines this exit trade as a Buy 1 Calendar Spread. Since we are buying, start limit order with a low limit price, so that it can be cancel and corrected (updated) multiple times to achieve a better price. In this example started at 0.038. See the screenshots below for an example order.

Order Entry:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - SpreadTrader Order Entry

Order Preview:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Short Leg Order Preview

Active Orders:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Orders

Trade Summary

Looking at the chart, trying to achieve the lowest price makes sense, as we wish the difference between the near month Jun 18 and far month Aug 18 to shrink not expand. This can be a good til cancelled (GTC) order that can be hung out there until a price target is achieved – historically there seems to be support at 0.040 to 0.030 range, so that could be a good starting target (but you can obviously adjust for your trading style). If you want to get an immediate fill on a trade exit today, then just cancel and correct the order in 0.001 increments until it fills. Alternatively you can leave the order out there for the trading day to see if anyone nibbles at it, then get more aggressive on closing it nearer the end of the day.

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Chart 6 Month Limit Order

In theory most futures calendar spreads are mean reverting, so we are looking for a move back towards the long term mean to capture some gain. We are not looking to make a killing on the directional trade – even though this is a “long” natural gas trade it usually a pretty slow moving spread. Additionally the spread may only go into that range for a few hours or days during its remaining trade lifecycle into end of May expiration, so we just want to grab a good price with a GTC if it’s there. Also we don’t want to hang around for the unpredictable spread volatility for the 2 weeks or so prior to expiration, so if it is still open at that time we’d probably just close when it gets too close to expiration.

Portfolio Principles

Portfolio Principles – Risk Management

Risk management is arguably more important than any actual trading strategy. Multiple traders can run the same strategy, but could get widely different results because of their risk management rules and whether or not they actually apply their rules properly under market stress.

Take risky positions with small amounts of capital that limit downside on trade entry

Use capital efficiently – for example use ETF option spreads or deep ITM ETF call options instead of buying ETFs outright.
Where possible with exchange listed products use option spreads on trade entry to limit downside risk.

For risky positions in small cap or alternative investments the stop loss is zero, so only enter with what can afford to lose (e.g. use maximum $10k per idea).
Visualise what to do if that $10k position is down 90% – should be nothing because the risk was sized on trade entry.

Risk is always sized on trade entry and never increased through the lifetime of the trade

Don’t reestablish the same trade immediately after exiting for a loss. That is effectively the same not having any stop loss risk management.

Everyone has their maximum risk limit tolerance, except for some very rare investors like some institutional traders who don’t feel emotion or pain on losses.

Investment Themes

Cash is a really bad long term investment, and should be thought of as a constantly decreasing asset due to inflation. However cash is very useful to have for short or medium term opportunity. 100% invested is likely missed opportunity cost for an investment theme not thought of yet. 100% invested all the time is only suggested by the fee based investment management so they can get paid.

Recognise the difference between “themed generation investments” and just a trade. Long SPY call spread $250/$255 for next month, is just a trade (so don’t leave one leg on and treat it like an investment). Long bitcoin or 3D printing stocks can be a multi year trade.

Trading and long term holding are both ok in a portfolio – just be clear which positions fit each category.

In volatile markets like crypto currency a month can feel like a year. Global stock markets are not truly as volatile because they are very mature market – the perceived volatility is often due to investors position sizing traditionally makes it a large part of their net worth.

Don’t attempt to follow investment theme advice from too many sources because it clouds your vision. but read as much as you can on different investment opinions and perspective. If you read something you don’t agree with – decide why you don’t agree with it and see if there is any thing it could add to your own rules. Always stay with your own rules. Importantly investment is about what you believe other market participants will do, not your personal opinion. Your personal opinion on market direction isn’t worth that much. e.g. if you think S & P 500 is on the biggest bubble since Dutch tulips, but you have noticed that many other people are comfortable with it – might be getting limited long exposure.

House Money

“A stock operator has to fight a lot of expensive enemies within himself.” Reminiscences of a Stock Operator by Edwin Lefèvre

After a large profit take the original risk out of the position, then let the rest run as “house money”. Always try and play long term with “house money” if you can because it removes some of the original fear of loss from the trade.

You are probably limited by what you believe is a lot of money. This type of scenario is directly applicable to the crypto market for the last year. Assume you invested $10k, then exited original $10k from position – so still have a position but no risk – and over time the “house money” position goes to $100k. If ultimately lose $100k of “house money” from the peak valuation of that investment – is that an acceptable risk ? If you make have unrealised gains of $100k do you want to exit immeadiately because you cant stand to give it back ? What if the unrealised $100k profit goes to $50k but they goes to $200k afterwards ? Can you handle the swings – even with house money ?

Do you assess the trade based on how much money you have in it ? Or it is based on the investment idea still being valid ?

If you lose on the trade do you anchor to that loss ? Or do you believe that opportunity always come along ?

There are never optimal trades in financial markets, only “good enough”. You will always leave something on the table. Does this achieve initial trade targets ? Whether is was a winner or a loser – was it a well managed trade ? Loser management is as important as winners.

The legendary investor Bernard Baruch who came through the 1929 crash mostly in tact was asked what made him such a successful investor. He replied: “I always buy ‘too late,’ and sell ‘too early.’”

Managing position trades through big swings

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.” Reminiscences of a Stock Operator by Edwin Lefèvre

“Old man Partridge’s insistence on the vital importance of being continuously bullish in a bull market doubtless made my mind dwell on the need above all other things of determining the kind of market a man is trading in. I began to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing, initial impulse, the fact is that its continuance is not the result of manipulation by pools or artifice by financiers, but depends upon basic conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.” Reminiscences of a Stock Operator by Edwin Lefèvre

“Bill Gates got his money because he owned a stock, Microsoft, and it went up eight hundred times, and he stayed with the trend. He sat through one of the greatest bull runs in the history of civilization. He understood the pain of gain.
Paul Tudor Jones (Tudor Investment Corporation) in Tony Robbins “Money: Master the Game”

Personally I believe it is physiologically easier for me to trade a limited risk option spread strategy because I know how much I can lose every month – but the expected return is only 5% to 10% a year. However handling huge swings in a wild crypto bull market is much harder – yet infinitely more profitable – and after taking out the original stake to play with house money there is no money at risk. It is way more profitable to simply hold positions in a bull market, than trade around them.

Position Entry

This quote is from Paul Tudor Jones (Tudor Investment Corporation) in Tony Robbins “Money: Master the Game” – after showing a picture of rapidly sloping up chart with a “You are here” arrow at the top of it, this is the quote:

“How many people want to be long and stay long this chart?” And about 60% will raise their hands. And how many want to get off this investment and sell it ? Then 40% or so will say get out. And I say “You 40% should never ever invest your own money in your entire life! Because you’ve got this contrarian bug, and this the greatest way to ruin that there possibly is. It means you’re going to buy every brand – you’re going to buy things that go to zero and sell things that go to infinity.”

Do you have a temptation to buy cheap on the way down? Buying cheaper is good, but better done when potential is not yet released in new issues that have no overhead supply. Will make more money buying into a market rising off a low base, than trying to pick a bottom in a “race to the bottom”in multi month decline.

Which of these are you tempted to buy ?

Option 1 – uptrending market that is already 20% for the year moving to recent multi year highs, off a 1 year flat base
Option 2 – downtrending market that is already down 60%, and heading steadily lower over a number of months with some -10% months along the way

Its really hard for me to do 1 & very easy for me to 2, because of personality type. Don’t like to overpay for anything & like the idea of getting a “bargain” (cheapskate). Plus the implication that you are smarter than the market because you picked close to the bottom (ego).

Final quote from Paul Tudor Jones “Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.”

Download Portfolio Principles eBook for Kindle

Exiting Bitcoin Investment Trust due to Premium

This trade exit on GBTC describes how exiting Bitcoin Investment Trust due to premium was decided. The original GBTC position was purchased in March 2017. To recap the GBTC is an investment trust whose price is tied to bitcoin. The historically high premium to the actual underlying bitcoin price is the main reasoning for selling our GBTC position and replacing it with bitcoin and etheruem products that can replicate similar exposure (without that premium). This trade was IRA eligible so there was no issue of paying extra capital gains by selling after 11 months (instead of waiting for 12 months for long term capital gains to kick in).

Exiting Bitcoin Investment Trust due to Premium

The charts below compares an European based Bitcoin fund SE:BITCOIN.XBT (as a proxy for Bitcoin spot price) with GBTC. This clearly shows that throughout 2017 people have been prepared to pay a huge premium to own bitcoin in their US based brokerage account.

GBTC Feb 2018 1 year trailing premium
Bitcoin Investment Trust GBTC Trade Exit - Feb 2018 1 year trailing premium - 20180215

GBTC Feb 2018 3 month trailing premium
Bitcoin Investment Trust GBTC Trade Exit - Feb 2018 3 month trailing premium - 20180215

Combined with bullish Bitcoin 2017 price action and inflated premium, the GBTC price has moved up strongly. The above charts and Bloomberg show how the GBTC premium has moved for the last 12 months in a trading range of 50% to 120%. In only the last 3 months the GBTC premium has been as high as 120% in Dec 2017 and low as 30% in early Feb 2018. The premium trades aggressively higher on rallies and lower on sell offs. This behaviour has the effect of amplifying trading extremes, but increasingly makes it a less reliable buy and hold product.

As a recap, when the trade was entered in March 2017 GBTC premium had shrunk down to about 8% because there was the belief that a new Winklevoss Twins bitcoin ETF was about to be allowed by SEC. Once that was announcement was negative, the GBTC premium returned with a vengeance.

According to Bloomberg the average trailing 12 month GBTC premium was 53% (on 16th Feb 2017). By comparison the Bitcoin tracker fund premium was 0.08%. Additionally there is a 2.0% management fee associated with GBTC which is used to help manage the cold storage and security of the underlying bitcoin asset – so any premium paid on the actual GBTC spot price would seem to be excessive. The Bitcoin tracker fund management fee is 2.5% (higher) but since it trades at only 0.08% premium to NAV it is a relative “bargain”.

On 16th Feb 2017 GBTC had a 1 year performance return of 1,574.75% that more than double the Bitcoin tracker fund 1 year return of 774.33%. This is amazing given that the stated aim of the products is identical – the GBTC out performance results are exclusively due to premium.

For reference here are the Bitcoin and Ethereum products available that trade in Europe but can be traded in a US based brokerage account. These products do not have a huge premium to spot bitcoin and are IRA eligible. Bizarrely the swedish Krona product has the higher volume, over the Euro based product. All of these fund products introduce some currency risk exposure, but that is likely less to be way less variable than the GBTC premium risk.

CoinCurrencyInfo
Bitcoin Swedish KronaCOINXBT:SS
Bitcoin EuroCOINXBE:SS
Ethereum Swedish KronaCOINXBE:SS
EthereumEuroCOINETHE:SS

A Good Trade but Poorly Traded

This GBTC trade was ultimately a great investment, but one that was traded frustratingly poorly.

A small tranche was sold in May 2017 to cover the risk on the original position and the rest was left to run as “house money”. Clearly with hindsight that was the “wrong” thing to do, but is it good risk management on a very volatile product – and allows staying in the trade for a much longer amount of time. This risk management part was not poor trading, but the management of the resulting price action in 2017 can be improved – as discussed below.

The final run up into Dec 2017 was not well traded, and therefore missed the significant peak at $39, and survived the drop to $10 in Feb 2017, so decided to exit with some value still intact at $18. This is a very hard trade to take psychologically because of the anchoring to the high point at $39. However the 1300% returns in less than a year is still amazing, yet disappointing from a trading perspective. The split adjusted entry point was $1.44 so clearly this was all “house money” but some exit trading at higher prices should have been achieved into the Dec 2017 peak. This is not purely hindsight – it was clear the short term nature of the blow off top, even during Dec 2017. This does not mean the end of the bitcoin “bubble” – just a medium term trading top that should have been taken advantage of.

Bitcoin Investment Trust premium – Trade Exit

GBTC premium expands on rallies (up to 120% in Dec 2017) and contracts on huge sell offs (down to 30% in early Feb 2017). On trade exit at about $18 that is approximately an average 80% premium, which is somewhere in the middle of the range extremes for the last year. On trade exit with bitcoin at approximately $10k, the book value (or NAV) of GBTC was about $10, therefore there is approximately $8 of premium to nav (or about 80%). Therefore about 1800 shares of GBTC buys approximately one bitcoin, but the book value is about 1000 shares. Clearly there is a convenience premium, but 80% over book value is very high. That does not mean GBTC price cannot rise further, or the premium increase more in 2018. However if the premium ever shrinks to say 30% then it is quite possible to lose money in GBTC even if the bitcoin price goes up. When you buy GBTC at $18 about 45% of your purchase is premium (or “fluff”) over the price of the underlying bitcoin. That is a very hefty premium to spot.

Trade Entry was at GBTC split adjusted $1.44 (actual pre split price at that time was $131) in March 2017 when bitcoin was approximately $1250. Trade exit was $17.96 when bitcoin was about $10025 in Feb 2018.

Trade Replacement

The GBTC investment can be replicated without premium using the Bitcoin tracker funds. Since 1000 shares of GBTC represents approximately 1 Bitcoin, these trading approaches could be taken:

1. Sell 1000 shares of GBTC ($18,000 USD) and purchase $10k Bitcoin tracker fund – this maintains exactly 1 Bitcoin exposure. The remaining $8000 premium can be maintained as cash for future purchases if there is a pull back or for other investments. This maintains bitcoin only exposure.

2. Sell 1000 GBTC then purchase $10k Bitcoin tracker fund and $8k Etheruem tracker fund. This gives exactly 1 Bitcoin exposure but allows using the GBTC premium to buy a new Etheruem position. This has created a slightly more diversified crypto portfolio – but still fully invested in crypto, with no cash on hand.

3. Sell 1000 GBTC then purchase $6k Bitcoin tracker, $6 Etheruem, and keep $6k cash. This gives a less aggressive portfolio because it keeps some cash on hand in case of a pull back.

4. Sell GBTC and maintain cash to wait for a big pullback to invest. If you are a believer in the long term crypto currency bull, this is arguably the biggest opportunity risk – crypto prices are hard to predict and can be notoriously bubbly – so it having exited once at lower prices it is hard to reestablish at significantly higher prices.

These reallocation strategies are all tax optimal in an IRA.

Summary

There is a significant chance that if there is a bullish BTC price march in 2018 towards $20k again then GBTC will do very well. Indeed one day later BTC is already trading 10% higher at $11,000 (so clearly this is proving a badly timed exit). However there need to be discipline to recognize when that the GBTC trade now has premium risk outside of just Bitcoin spot price risk. That risk can be resolved by selling GBTC and buying bitcoin tracker funds.

This is not necessarily a price extreme for bitcoin, but a potentially a premium extreme in GBTC. Still bullish on bitcoin and crypto assets for the next few years, however GBTC may not prove to be a good long term buy and hold product (due to the premium).

In summary this is not purely a bitcoin play, but has become a play on the premium investors are prepared to assign for the convenience of exchange traded bitcoin product. Importantly selling GBTC is a not a bearish call on bitcoin or crypto in general, just trying to avoid being the last one out when playing musical chairs with the premium trade.

Robotics and Artificial Intelligence Investment Basket

The Internet of Things, Robotics and Artificial Intelligence are nice buzz words in 2017 & 2018. But how to structure an investment response to it ? This explores how to create a simple purchasable basket of exposure without too much individual stock risk. With limited time we dont personally have the time to go down the rabbit hole of individual stock investing. That said we did end up chosing one stock for the “internet of things” exposure.

Robotics and Artificial Intelligence banner - 20180111

Robotics and Artificial Intelligence Investment Basket

Looking for exposure to the theme there are a couple of existing ETFs. This seekingalpha article compares the holdings of ROBO & BOTZ. Given that both ETFs both had merits, they were equal weighted in the final investment basket.

Internet of Things

There is a SNSR etf that is trying to provide an “internet of things” theme, but as pointed out here it has :

  • a very high correlation to the standard technology sector XLK (so you are really just buying a less liquid technology ETF)
  • the internet of things theme cuts across sectors, and some stocks included in SNSR only have a small part of their operations dedicated to it.

The basket used a 10% allocation to IDCC instead of SNSR, because it one of those rare technology stocks that is actually cheaper priced in Jan 2018 than one year earlier.

Investment Basket

This was the investment basket decided upon:

ROBO – 45% – Robots and Automation – ETF overview
BOTZ – 45% – Robotics and Artificial Intelligence – ETF overview
IDCC – 10% – internet of things – company overview