I recently spent 10 days in London meeting with and evaluating managers. I came back extremely negative on both the UK and Europe as a whole. Wanting to make good use of this perceived insight, I started looking at buying puts on European ETFs, specifically the iShares EFA. Trading volume is nonexistant, however. On a good day, the thing may trade 3 or 4 times. Most days volume is 0. This is on a September 2008 at the money put. What am I missing? How does a retail investor hedge out European exposure and/or make a bet on Europe going down? I figured EFA was well known enough to have some volume. The foundation I work at just shorted $250m of options on that same ETF. Why am I not seeing any volume? You could drive a truck through the bid-ask. Anyone have any insight?
2 questions: (1) Everybody is talking about shorting european financials. Why? (2) Why EFA? It has under 25% financials and lots of asian & energy exposure It is already down 17% for the year. In it’s 20+ year history, the lowest annual return it has ever generated is -17.8% (1 time only, in 2002). I’m no statistical genius but don’t you think you may be selling low? disclosure: I’m a buyer’n’holder of EFA. I guess i’m biased.
I’m not looking just at financials. I’m looking at Europe as a whole. I’m also looking for a fairly short-term event. Disclosure: I bought and hold Vanguard’s European ETF VGK, so this is somewhat of a bastard protective put. I just thought EFA would have more volume, but I was wrong. The theory on Euro financials is that they are (potentially) a 6m lag behing the U.S. John Paulson’s pitch book for his credit fund has this terrifying chart of the U.S. housing bubble. He then overlayed the UK’s bubble on top and it is even scarier. That is what a lot of the talk is about.
What’s wrong with futures contracts or buying a put on a futures contract? Eurostoxx is a very liquid contract, for example.
jrumph Wrote: ------------------------------------------------------- The foundation I work > at just shorted $250m of options on that same ETF. I find this hard to believe. Are you sure they didn’t short the futures? Shorting that much in options is asking for a Brian Hunter-type disaster. In a related topic, I’ve been buying puts on retail and regional bank ETFs, the liquidity is not great but I camp out in between the bid/offer and hope for a seller. It takes me days to accumulate a small position. As I mentioned in an older thread, I tend to exit in-the-money positions via exercise or buying/shorting the underlying on expiration Friday as opposed to selling the option since you get crushed on the spread.
Positive. It was part of a custom collar. The broker we used said they could get better execution using the ETF than the future. JDV- I’ll admit ignorance. I know how to buy a put on an ETF in my brokerage account. I do not know the medium to use to buy a put on a futures contract. farley013 Wrote: ------------------------------------------------------- > jrumph Wrote: > -------------------------------------------------- > ----- > The foundation I work > > at just shorted $250m of options on that same > ETF. > > I find this hard to believe. Are you sure they > didn’t short the futures? Shorting that much in > options is asking for a Brian Hunter-type > disaster. > > In a related topic, I’ve been buying puts on > retail and regional bank ETFs, the liquidity is > not great but I camp out in between the bid/offer > and hope for a seller. It takes me days to > accumulate a small position. As I mentioned in an > older thread, I tend to exit in-the-money > positions via exercise or buying/shorting the > underlying on expiration Friday as opposed to > selling the option since you get crushed on the > spread.
So it sounds like they structured an OTC option, not a listed, tradable option? Is it a put or call and what is the month and strike? That is a hell of a short position if you ask me. I once shorted $200 of GOOG puts and got smacked with a $3,000 loss when it tanked, that is what happens when these types of trades go bad.
Just open an account at some online futures broker that does options (most of them, I think).
farley013 Wrote: ------------------------------------------------------- > So it sounds like they structured an OTC option, > not a listed, tradable option? Is it a put or call > and what is the month and strike? That is a hell > of a short position if you ask me. I once shorted > $200 of GOOG puts and got smacked with a $3,000 > loss when it tanked, that is what happens when > these types of trades go bad. We’re a $4b foundation… Using it as part of a collar to hedge equity exposure.
Doesn’t answer my question. Nevermind.
jrumph Wrote: ------------------------------------------------------- > farley013 Wrote: > -------------------------------------------------- > ----- > > So it sounds like they structured an OTC > option, > > not a listed, tradable option? Is it a put or > call > > and what is the month and strike? That is a > hell > > of a short position if you ask me. I once > shorted > > $200 of GOOG puts and got smacked with a $3,000 > > loss when it tanked, that is what happens when > > these types of trades go bad. > > > We’re a $4b foundation… > > Using it as part of a collar to hedge equity > exposure. Wait, you bought put and sold call in the collar right? essentially, you sold the call so someone would sell you the put? You’re not short Puts are you?
Keep it simple - Buy EFU (Ultrashort EAFE), however I would say that you are already late to this party. Up 25% the last 3 months.
ahahah Wrote: ------------------------------------------------------- > jrumph Wrote: > -------------------------------------------------- > ----- > > farley013 Wrote: > > > -------------------------------------------------- > > > ----- > > > So it sounds like they structured an OTC > > option, > > > not a listed, tradable option? Is it a put or > > call > > > and what is the month and strike? That is a > > hell > > > of a short position if you ask me. I once > > shorted > > > $200 of GOOG puts and got smacked with a > $3,000 > > > loss when it tanked, that is what happens > when > > > these types of trades go bad. > > > > > > We’re a $4b foundation… > > > > Using it as part of a collar to hedge equity > > exposure. > > Wait, you bought put and sold call in the collar > right? essentially, you sold the call so someone > would sell you the put? You’re not short Puts are > you? Correct. Sell calls to pay for puts. It is purely an equity hedge. Farley- Not giving anymore details on the trade. No need for you to know strike, expiration, etc.
fxguy1234 Wrote: ------------------------------------------------------- > Keep it simple - Buy EFU (Ultrashort EAFE), > however I would say that you are already late to > this party. Up 25% the last 3 months. I haven’t looked at that one, but I am not a fan of the ultrashorts. There were too many days where oil was up and DUG (2x short oil) was up as well. Talk about tracking error.
I agree with jrumph… I have sworn off ultralongs and ultrashorts in favor of using standard longs in long or short positions. If needed, I’ll lever it myself. I still have a short of an ultralong in place, but once I close that position I’m not going back. A non-ultra short fund might have a useful role, but I have to think about it.
Yeah, I’ve never been into ultrashorts either. If you want to get short an index short an f-in index. Gives you leverage if nothing else…