How to make a deeply out-of-the-money market

ironchef said:
Sorry I am not familiar with the Australian market. I trade US market exclusively.
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I don't think there are many differences. Puts behave the same way, they have all the properties of puts.

I don't know if this is different but the ASX takes a fee per option (13c) on top of broker costs so I need to formulate that into my plan but it just means I can hold fewer contracts for the same capital outlay than if the fee didn't exist. Also the contract is detached from the original writer once the exchange has been approved so I am not responsible for the credit worthiness of the writer but rather at the mercy of ASX's ability to mange its risks.

I don't think the Australian market presents any fundamental differences in options.
 
hahaaaa... you think the Commonwealth Bank of Australia is going to zero.....

I'm out.........

no I'm not....

So you think that because of the housing market correct?

If the CBA goes, than every bank goes... and SPI will sit at -80%
 
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Is that you bidding 3000 x 0.003 in the Dec'18 36 put? That's not going to happen... There's a 10 cent bid in the June'18 35.84 put... and that's not getting filled... so you would need to bid more than that....
 
JackRab said:
Is that you bidding 3000 x 0.003 in the Dec'18 36 put? That's not going to happen... There's a 10 cent bid in the June'18 35.84 put... and that's not getting filled... so you would need to bid more than that....
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No, I haven't made any bids.

I think that the iron ore spot price is moving towards historical averages somewhere around $50USD. I think that the cost structures in Australian iron ore mines are no longer going to be justifiable and we will experience an industry down turn.

In conjunction with this and other factors that could also present headwinds for the Australian economy we will see an unwinding of the housing market and CBA is positioned well to really feel the pain.

Maybe I'm dumb, but nothing seems to justify the behaviour in the market. The volume of the bank bill market is dropping and weird exotic markets like hybrids are growing. Look at CBA PEARLS and try to figure out exactly what they are and how they will behave (like debt in the good times, equity in the bad).

Also they are doing dodgey shit like:

https://www.commbank.com.au/content...S_VIII_Capital_Notes_Prospectus_16_Feb_16.pdf

In there you will find that the worthless debt they are selling can't be subject to credit ratings because the offer comes from CBA's New Zealand operations.

>This Prospectus does not provide information in relation to the credit ratings of CBA or PERLS VIII as the companies which provide ratings in relation to CBA only hold Australian Financial Services Licences which allow disclosure of this information to certain investors.

But they are sure to dress it in all the finery of CBA's AAA Marketing without ever quite highlighting just how risky this shit is.

These things get stranger and stranger. When ANZ offered some hybrids internationally (http://www.afr.com/business/banking...brid-raising-after-ato-ruling-20160530-gp76eg)

> Standard & Poor's said on Monday it had assigned a "BBB-" rating to the securities.

Which is the lowest investment grade available.

It just doesn't compute.
 
sle said:
You're trolling us, right?
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No I just believe what I believe and I would like to just talk about optimal strategies rather than will it or won't it happen. But this is what I can afford to speculate with (I realise this is not an investment) and I am eager to learn and I will probably just loose $10K but I might learn something out of it.
 
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JackRab said:
hahaaaa... you think the Commonwealth Bank of Australia is going to zero.....

I'm out.........

no I'm not....

So you think that because of the housing market correct?

If the CBA goes, than every bank goes... and SPI will sit at -80%
More...

Oh and I think that there is a clear housing bubble as seen by the divergence of debt-to-income, house prices-to-rental-income, housing availability remains steady. Low but steady and it looks like immigration is being cut back slightly. If there were a housing stock shortage I would expect to see vacancies at fractions of a percentage, a lot closer to zero. I also think that if there was a housing stock shortage we would be seeing rental rates increase as people competed for the right to the shelter. Sydney house prices rose 12% in reports from December last year, in that same period rental prices dropped 3%. Some of that is seasonality but not all of a 15% difference can be justified because of the seasons.

There isn't as much foreign investment in the Australian market as people are lead to believe. But they do present a risk in the sense that China is currently going through a series of financial industry corruption investigations that are uncovering widespread corruption. This and potential regulation of the shadow banking industry could see investors in Australia bail out to protect their capital.

There are just too many red flags in my mind and I think the actions have shown that any correction will be market based and won't be a controlled unwinding through government intervention.
 
PERLS are just perpetual bonds, which in effect is equity paying a fixed interest rate. So they indeed behave like bonds... until we hit a crisis situation and it trades like equity. That's nothing new there... lot's of banks around the world have those.

But because they are not like bonds, which normally always pays back the face value... any rating agency, especially after GFC, will give them lower ratings...

Those perpetuals were dogshit during GFC... so the agencies should be a bit careful with their ratings.

EDIT. The one you mentioned give a floating market rate + 3.80 fixed. Current yield is about 5.1%
 
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I get it though...

The Australian economy is vulnerable... mainly depends on China/commodity exports...

And yes, the housing market is a bit rich... but mainly in the major cities. Sydney at the highest. Everybody wants to live close to the CBD and near the beaches... and there's not a lot of room to go, since we can't go East.

But IMO, there will be some pressure but a collapse I seriously doubt. There is still a lot of free standing housing in the major cities, which will (and is) change to more and more apartments. Developers are buying whole blocks for ridiculous per house prices, but with rezoning that will be redeveloped into apartment blocks and high rises. So those prices are warranted.

I think you might be reading a bit too much into the negativity at the moment...

CBA might drop a fair bit, but 0.... nah mate.

If I where you, I would aim for 50-ish... anything beyond that is a bonus.
 
JackRab said:
PERLS are just perpetual bonds, which in effect is equity paying a fixed interest rate. So they indeed behave like bonds... until we hit a crisis situation and it trades like equity. That's nothing new there... lot's of banks around the world have those
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Non-viability clause introduced in the new style hybrids presents extra risk.

https://smitrust.com.au/smblog/asic-uncovers-investor-bias-to-hybrid-securities/

When surveyed it looks like people aren't aware of the risks they are taking on. One of the main reasons that subprime mortgages were being given out like candy in the US was because the market was incentivised to sell them.

From the above article:

>The reason banks have been falling over themselves to sell mums and dads AT1 hybrids is because they count as equity capital and are at least 25 per cent cheaper for the bank than ordinary shares.

I cannot see when the music stops there being enough to cover the fantastically large private debt that Australian's have racked up.

------- Strategy below here -------

Anyway, regardless. In such a situation, given that you're now aware of all the particulars and that I understand the risks involved with being able to lose my investment completely would a three-month insurance style strategy that I shouldn't expect to roll be best?

I like the idea because if I do decide to trust CBA's SP I can exit with less hassle.

Is three months a standard time frame? I understand that time will effect the price of the option but are there any trade-offs/benefits to using say a six month rather than a three month. As long as I make sure that I am covered by the next set as the previous options expire then am I protecting my position? (even if you disagree with its reasoning)
 
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