Sunday, December 21, 2008 9:13:18 AM
Cashing In on the Cash Bubble
IS CASH A BUBBLE? Are investors too risk-averse?
Options traders are now debating these controversial questions as they prepare for a 2009 that they hope will be more sanguine than 2008, which challenged long-held assumptions about options pricing and the fundamental nature of volatility.
The recent clamor to buy four-week Treasury bills with a zero-percent yield perfectly expresses the market's mania for absolute safety, while the Federal Reserve's decision to lower the federal-funds rate to a range between zero to a quarter of a point suggests Federal Reserve Chairman Ben Bernanke is waging war on cash to force money back into the financial system.
"Bernanke is trying to break the bubble in cash," says Steve Sosnick, risk-manager for Interactive Brokers' Timber Hill market-making unit.
If the cash bubble bursts, the record amounts of cash held by investors and corporations would flow back into the financial markets, benefiting stock prices and other assets, including fixed income, emerging markets, commodities and currencies. Even moribund investment bankers might get some action if corporations resort to mergers and acquisitions to increase depressed earnings, or diversify product suites.
While everyone would love to see the cash bubble burst because it would lift equity prices, the cash-as-bubble makes many traders uneasy, because it underscores the woes of the financial system.
BUT TRADERS KNOW that hype -- and "cash as king" is a good candidate -- always ends in a major transfer of wealth on Wall Street.
"One way to play this is to buy 20- delta calls on riskier stocks or even six-month or one-year wide call spreads on those riskier names -- retailers, airlines, homebuilders," says Jack Gonzalez, who deals with many hedge funds as UBS's head of derivative flow sales. Delta is the rate of change in an option's price in response to changes in the underlying stock. A 20-delta option is typically far out-of-the-money. A 100 delta option is essentially a stock proxy.
While not mathematically correct, many traders think 20-delta calls have a 20% chance of finishing in-the-money. So buying 20-delta calls on risky stocks offers a cost-effective way to wager on rebounds without risking tons of money.
http://online.barrons.com/article/SB122973290025323025.html?mod=9_0002_b_online_exclusives_weekend
IS CASH A BUBBLE? Are investors too risk-averse?
Options traders are now debating these controversial questions as they prepare for a 2009 that they hope will be more sanguine than 2008, which challenged long-held assumptions about options pricing and the fundamental nature of volatility.
The recent clamor to buy four-week Treasury bills with a zero-percent yield perfectly expresses the market's mania for absolute safety, while the Federal Reserve's decision to lower the federal-funds rate to a range between zero to a quarter of a point suggests Federal Reserve Chairman Ben Bernanke is waging war on cash to force money back into the financial system.
"Bernanke is trying to break the bubble in cash," says Steve Sosnick, risk-manager for Interactive Brokers' Timber Hill market-making unit.
If the cash bubble bursts, the record amounts of cash held by investors and corporations would flow back into the financial markets, benefiting stock prices and other assets, including fixed income, emerging markets, commodities and currencies. Even moribund investment bankers might get some action if corporations resort to mergers and acquisitions to increase depressed earnings, or diversify product suites.
While everyone would love to see the cash bubble burst because it would lift equity prices, the cash-as-bubble makes many traders uneasy, because it underscores the woes of the financial system.
BUT TRADERS KNOW that hype -- and "cash as king" is a good candidate -- always ends in a major transfer of wealth on Wall Street.
"One way to play this is to buy 20- delta calls on riskier stocks or even six-month or one-year wide call spreads on those riskier names -- retailers, airlines, homebuilders," says Jack Gonzalez, who deals with many hedge funds as UBS's head of derivative flow sales. Delta is the rate of change in an option's price in response to changes in the underlying stock. A 20-delta option is typically far out-of-the-money. A 100 delta option is essentially a stock proxy.
While not mathematically correct, many traders think 20-delta calls have a 20% chance of finishing in-the-money. So buying 20-delta calls on risky stocks offers a cost-effective way to wager on rebounds without risking tons of money.
http://online.barrons.com/article/SB122973290025323025.html?mod=9_0002_b_online_exclusives_weekend
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