Comments on: A blast from the past http://sovereignspeculator.com/2010/01/15/a-blast-from-the-past/ Thoughts on the markets and the decline of the west Mon, 20 Dec 2010 21:57:04 +0000 http://wordpress.org/?v=2.6 By: Graphite http://sovereignspeculator.com/2010/01/15/a-blast-from-the-past/#comment-8184 Graphite Mon, 18 Jan 2010 09:42:27 +0000 http://sovereignspeculator.com/?p=3341#comment-8184 If leveraged ETFs start having counterparty problems, equity options probably won't be far behind. Although options are somewhat less esoteric and more solidly backed than some of the contracts used by the ETFs, the option clearinghouses are really not set up to withstand multiple discontinuous crash-like moves. In 1987, simple index futures (with their daily cash settlement) nearly prevented the CME from staying open. If leveraged ETFs start having counterparty problems, equity options probably won’t be far behind. Although options are somewhat less esoteric and more solidly backed than some of the contracts used by the ETFs, the option clearinghouses are really not set up to withstand multiple discontinuous crash-like moves. In 1987, simple index futures (with their daily cash settlement) nearly prevented the CME from staying open.

]]> By: Pej http://sovereignspeculator.com/2010/01/15/a-blast-from-the-past/#comment-8183 Pej Mon, 18 Jan 2010 06:42:50 +0000 http://sovereignspeculator.com/?p=3341#comment-8183 What about buying puts on those triple leverage ETFs then? That would reduce further more your risk AND capital deployment. Although I'm not thinking at the moment that there will be counterparty defaults at the moment (and even less that in case of default, they wouldn't be bailed out...), I'm guessing that in your armageddon scenario, PUT contracts would not be honoured though and that they would be defaulted on? What about buying puts on those triple leverage ETFs then? That would reduce further more your risk AND capital deployment.

Although I’m not thinking at the moment that there will be counterparty defaults at the moment (and even less that in case of default, they wouldn’t be bailed out…), I’m guessing that in your armageddon scenario, PUT contracts would not be honoured though and that they would be defaulted on?

]]> By: Mike http://sovereignspeculator.com/2010/01/15/a-blast-from-the-past/#comment-8182 Mike Sun, 17 Jan 2010 21:57:22 +0000 http://sovereignspeculator.com/?p=3341#comment-8182 Sure, that works fine, but you have to pay interest when you borrow the shares. One nice strategy here is not to short TWM or SPY, but to short a 2x or 3x ultra-long ETF. This way you can deploy less capital, as well as benefit from their decay, with maybe the added bonus that in an armageddon scenario the swap counterparties default and the instrument becomes worthless! Sure, that works fine, but you have to pay interest when you borrow the shares. One nice strategy here is not to short TWM or SPY, but to short a 2x or 3x ultra-long ETF. This way you can deploy less capital, as well as benefit from their decay, with maybe the added bonus that in an armageddon scenario the swap counterparties default and the instrument becomes worthless!

]]> By: PEJ http://sovereignspeculator.com/2010/01/15/a-blast-from-the-past/#comment-8181 PEJ Sun, 17 Jan 2010 21:51:20 +0000 http://sovereignspeculator.com/?p=3341#comment-8181 what about shorting long etfs? like going short IWM instead of TF? You'd also collect interest on the proceeds, in an interest bearing environment (that's what I've done). what about shorting long etfs? like going short IWM instead of TF? You’d also collect interest on the proceeds, in an interest bearing environment (that’s what I’ve done).

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