The average annual credit loss in high yield bond portfolios was 2.65% between 1992 and 2011. During that same time period, your average yield for taking that credit risk was 10.25% and your average option adjusted spread was 5.7% . Today, that total yield has dropped to 4.96%
High Yield - The New Risk Free Asset Class
At 4.96% you are picking up 4.04% above a comparable tenor in US treasuries. With a 2.65% average credit loss, you are expecting a 1.39% risk premium for taking on junk credit risk if we experience historical average credit losses. Do not worry though, because volatility has been removed from all asset classes.
Posted in Markets.
– May 10, 2013
With a little bit of elbow grease and some knowledge of programming in VBA or another language, you too can recreate the indices represented by VXX, VXZ, or maybe even your own volatility futures index.
The VIX Futures data is available historically going back to 2004 from the CBOE Futures Exchange. You just need to bring all of the data into a framework that is easily understood from a programmatic standpoint. You can download the data here or shoot me an email if you need assistance.
The second step is to dig into the prospectus for VXX and VXZ. There is actually quite a bit of information available, just jump to page 20 and 21 of the following pdf:
Ipath VIX Prospectus
If the math is scary, you probably do not want to tackle this project
Once you are able to meld the formula with the underlying VIX Futures data, you will be pleasantly surprised at how accurate your own estimate of the index is:
You will not be pleasantly surprised to know that if you invested $100 in VXX at the beginning of 2008, you would have ~$2.70 today…
Posted in Derivatives, Educational.
– May 7, 2013
Guest Post from Chris Vermeulen at TheGoldAndOilGuy.com
How to trade Gold and other precious metals related investments is not that complex. But you must be willing to wait for price to provide low risk entry points before getting involved. Precious metals are like any other investment in respect to trading and investing in them. There are times when you should be long, times to be in cash and times to be short (benefit from falling prices).
Since 2011 when gold and silver started another major bull market correction the best position has been to move to cash or sell/write options against your positions to protect your investment until the next trend resumes.
If you take a look at the chart below of gold you will notice that in 2008 we had a similar breakdown in price which purged the market of investors who where long gold. And if you compare the last two breakdowns they look very much the same. If price holds true then much higher prices are likely to unfold at the end of 2013.
The key here is for the price to move and hold above the major resistance line. If it can do that then we are looking at a possible breakout to $2600 – $3500 gold. With that being said gold and silver may just be starting a bear market. Depending what the price of gold does when my resistance level is touched, my outlook may change from bullish to bearish.
Also with last weeks economic numbers getting better in the USA I do have concerns that gold may be starting a bear market but we will not know for several more months yet.
How to Trade Gold Daily Technical Chart:
Major technical damage has been done to the chart of gold. This can be seen as bullish or bearish price action but until price and volume pattern unfolds which puts the odds on the bullish or bearish side I remain neutral.
How to Trade Silver Daily Technical Chart:
Silver is in the same position as gold. The question is if this is a shakeout or breakdown…
How to Trade Gold Mining Stocks Monthly Chart:
Gold mining stocks broke down a couple months ago and continue to sell off. If precious metals continue to move lower then mining stocks will continue their journey down. The chart below made in February and it has in most part played out as expected. While I do not try to pick bottoms (catch falling knives) I do like to watch for them so I am prepared for a new position when the time and chart become bullish.
How to Trade Gold, Silver and Mining Stocks Conclusion:
In short, precious metals continue to be in a down trend. While they look to be trying to bottom it is important to remember that the largest moves take place in the last 10% of a trend. So we may be close to a bottom but there could be sharply lower prices yet.
Posted in Markets, Technical Analysis.
– May 6, 2013