Saturday, September 1, 2012

Post Bernanke Liquidity Incoming

Bernanke Speech Week

So the media and markets have now concluded that action will be very likely next month, and we saw the sp500 first selloff, then rally. We didn't see a melt-up; and price hasn't cleared the resistence; however the positive bias now firmly remains in the market. 

Leading up to the Friday Bernanke moment, I was seeing some hard selling in some beta names, namely RIO and FMG getting sold off pretty hard. We saw FMG lose it's key 4.00 level as iron ore prices didn't catch a bid all week. I took my losses in FMG and closed my EURO LEAPS options position; pre-bernanke last night. Whilst this decision to close my euro leaps is probably costing me given the result of the Bernanke comments; risk management comes first, and I wanted to be less levered going into a large risk event. I had reduced my portfolio leverage from 1.41 to 1.2 prior to the annoucement, with no short positions.

How low will yields go, How long will liquidity last; and what should be the investor's response? 

EURO LEAPS I had bought euro leap options when the EUROstoxx was below 2200 - the options that were dated for 2018 expiry were very very cheap, and I managed to lock in a 50% gain from this position; however my timing and price of the exit may have been better timed had I understood the mechanics of the trading in this instrument. On Wed I tried to exit the position with a market order, but the order didn't execute. The next day I put in a limit order below the bid, and it got executed immediately at the market open. I would've saved about 150 basis points worth of costs if I had understood the liquidity and ordering of this market.

This week I started a few online courses on programming through and the key areas would be on understanding codes and algorithms and how that will apply to trading and portfolio management. This seems a good progression on my financial theory that I am slowly accumulating through both market experience, reading as much online publication from financial experts and the level III CFA. It's obvious in hindsight that the algo situation from Knight capital was spurred my the connection of risk management to programmingsoftware for market competitiveness in the increasingly complex high frequency trading game. 

Good weekend reading: 30 innovations that could change the world