Monday, July 18, 2011

How to trade a possible U.S. default??

While the hard deadline for a deal is Aug. 2, the closer we get to that date without a deal the more fear will become a factor in the markets. So how do you play this "default vs. no default" scenario?

If a deal is not struck, then we know a few things will probably happen:
  • The Bond Market will be crushed.
  • Bank stocks will be crushed (for the above reason)
  • Volatility will shoot through the roof (usually an accurate measure of fear in the markets)
  • S&P and DIJA will take a hit
Based on these outcomes, there are a few steps you can take to protect your portfolio from a possible market response to the debt dilemma.
  1. Make a volatility play such as buying VXX . This is a S&P 500 VIX Futures ETN. Essentially, it is an ETN that gains in value as futures contracts on volatility become more valuable. Thus, as more and more fear of a default enters the market, there will be a premium on volatility causing this ETN to gain in value.
  2. Open up far out of the money PUT options on an S&P ETF like SPY . The option will be cheap if you go far enough out of the money and will be sure to gain value in the case of a default (as we would see a huge hit to the S&P 500.)
  3. Short bank stocks. These will be the companies most vulnerable to a bond market crash, and there will be a lot of negative trading action on banks stocks in the case of a default.

Monday, July 11, 2011

What would a Sprint iPhone do to smart phone market share?

Piper's estimates below are currently based on an "iPhone-less" Sprint:
However, what would these projections look like if Sprint and Apple were to come to a deal before the end of 2012?? Surely, the Android growth line would have to be trimmed downwards to correct for increased competition on the Sprint network. It is estimated that even from the Verizon deal, Apple gained 10% of market share on new smart phone sales. Any opinions?

Wednesday, July 6, 2011

Diversification Continued....

Below is a simple example of how you might start to think about diversification. Although it is not all encompassing, it does a good job at illustrating all the components that make up an investment decision. It shows that although you may be looking at two different stocks or bonds; they may still share many other qualities, which can hurt your goals of diversification.

Here are some examples of diversification strategies as well:

These figures barely/hardly scratch the surface of how I will attempt to quantify diversification into "levels." However, the lingo of "Conservative, Aggressive, etc.." will be relatively similar. It no longer suffices to include only the categories of "Large Cap, International, Small Cap, Bonds, and Cash" due to the prevalence of new financial instruments such as ETF's and derivatives. So, for the purpose of this post, we will solely define the scope of our application.

We will include the following:
  1. Stocks
  2. Options
  3. ETF's
  4. Bonds
  5. Mutual Funds
  6. Cash 
Furthermore, the first five items in the list can be broken down even further.

For Stocks:
  1. Market Capitalization
  2. Industry
  3. Geography
  4. Volatility
  5. Dividend or No Dividend
For Options:
  1. IN/OUT of the Money
  2. All Aspects of Stock Above
  3. Length to Expiration
For ETF's:
  1. Allocation of Assets
  2. All Aspects of Stocks Above
  1. Credit Rating
  2. Length to Maturity
  3. Type of Bond
Mutual Fund:
  1. Manager
  2. All Aspects of Stock
I will build an algorithm that is capable of taking into account all the factors present for each of the different asset classes outlined above. It will then output a rating of diversification. I will start with a python application, and then progress to an iPhone application.

Tuesday, July 5, 2011

Apple App Ideas? Lets talk about DIVERSIFICATION

First and foremost, I hope that everyone had a good Fourth of July weekend.

While Python programming will continue to stay under the scope of this blog, I am going to start incorporating some Objective-C applications into the discussions as well. Essentially, I am going to start discussing different Application ideas that would be valuable to those interested in trading securities.

Today, the app idea that I am going to discuss is in regards to Portfolio Diversification.

I am going to step out on a limb here and assume that if you are a frequenter of this blog, then you already are familiar with the term Diversification. However, this blog is not in the business of discriminating against people who are interested in learning about the topic of trading and programming but have experience in neither. So, here is a definition of Diversification.

If one thing is certain about successful iOS apps, it is that you need a "gimmicky" title that is easy to remember (and therefore spread by word of mouth). For now, though, we will stick with the title, "Diversified??".

The purpose of the app would be to allow users to input the percentage of their portfolio dedicated to different securities, commodities, ETFs, bonds, cash, etc... And then based on a certain algorithm, determine a "level" of diversification that the user's portfolio achieves. This could then be used as a forward looking tool to determine whether an investment decision "lowers or raises your diversification level."

If I receive positive feedback on this app idea, then the next post will be dedicated to establishing an "algorithm" that would output an accurate "diversification level." Please comment with your thoughts on the usefulness of an app such as this or send me an email.