Everything You Always Wanted To Know About Swaps* (*But Were Afraid To Ask)
Hello, dummies It's your old pal, Fuzzy. As I'm sure you've all noticed, a lot of the stuff that gets posted here is - to put it delicately - fucking ridiculous. More backwards-ass shit gets posted to wallstreetbets than you'd see on a Westboro Baptist community message board. I mean, I had a look at the daily thread yesterday and..... yeesh. I know, I know. We all make like the divine Laura Dern circa 1992 on the daily and stick our hands deep into this steaming heap of shit to find the nuggets of valuable and/or hilarious information within (thanks for reading, BTW). I agree. I love it just the way it is too. That's what makes WSB great. What I'm getting at is that a lot of the stuff that gets posted here - notwithstanding it being funny or interesting - is just... wrong. Like, fucking your cousin wrong. And to be clear, I mean the fucking your *first* cousin kinda wrong, before my Southerners in the back get all het up (simmer down, Billy Ray - I know Mabel's twice removed on your grand-sister's side). Truly, I try to let it slide. Idomybit to try and put you on the right path. Most of the time, I sleep easy no matter how badly I've seen someone explain what a bank liquidity crisis is. But out of all of those tens of thousands of misguided, autistic attempts at understanding the world of high finance, one thing gets so consistently - so *emphatically* - fucked up and misunderstood by you retards that last night I felt obligated at the end of a long work day to pull together this edition of Finance with Fuzzy just for you. It's so serious I'm not even going to make a u/pokimane gag. Have you guessed what it is yet? Here's a clue. It's in the title of the post. That's right, friends. Today in the neighborhood we're going to talk all about hedging in financial markets - spots, swaps, collars, forwards, CDS, synthetic CDOs, all that fun shit. Don't worry; I'm going to explain what all the scary words mean and how they impact your OTM RH positions along the way. We're going to break it down like this. (1) "What's a hedge, Fuzzy?" (2) Common Hedging Strategies and (3) All About ISDAs and Credit Default Swaps. Before we begin. For the nerds and JV traders in the back (and anyone else who needs to hear this up front) - I am simplifying these descriptions for the purposes of this post. I am also obviously not going to try and cover every exotic form of hedge under the sun or give a detailed summation of what caused the financial crisis. If you are interested in something specific ask a question, but don't try and impress me with your Investopedia skills or technical points I didn't cover; I will just be forced to flex my years of IRL experience on you in the comments and you'll look like a big dummy. TL;DR? Fuck you. There is no TL;DR. You've come this far already. What's a few more paragraphs? Put down the Cheetos and try to concentrate for the next 5-7 minutes. You'll learn something, and I promise I'll be gentle. Ready? Let's get started. 1.The Tao of Risk: Hedging as a Way of Life The simplest way to characterize what a hedge 'is' is to imagine every action having a binary outcome. One is bad, one is good. Red lines, green lines; uppie, downie. With me so far? Good. A 'hedge' is simply the employment of a strategy to mitigate the effect of your action having the wrong binary outcome. You wanted X, but you got Z! Frowny face. A hedge strategy introduces a third outcome. If you hedged against the possibility of Z happening, then you can wind up with Y instead. Not as good as X, but not as bad as Z. The technical definition I like to give my idiot juniors is as follows: Utilization of a defensive strategy to mitigate risk, at a fraction of the cost to capital of the risk itself. Congratulations. You just finished Hedging 101. "But Fuzzy, that's easy! I just sold a naked call against my 95% OTM put! I'm adequately hedged!". Spoiler alert: you're not (although good work on executing a collar, which I describe below). What I'm talking about here is what would be referred to as a 'perfect hedge'; a binary outcome where downside is totally mitigated by a risk management strategy. That's not how it works IRL. Pay attention; this is the tricky part. You can't take a single position and conclude that you're adequately hedged because risks are fluid, not static. So you need to constantly adjust your position in order to maximize the value of the hedge and insure your position. You also need to consider exposure to more than one category of risk. There are micro (specific exposure) risks, and macro (trend exposure) risks, and both need to factor into the hedge calculus. That's why, in the real world, the value of hedging depends entirely on the design of the hedging strategy itself. Here, when we say "value" of the hedge, we're not talking about cash money - we're talking about the intrinsic value of the hedge relative to the the risk profile of your underlying exposure. To achieve this, people hedge dynamically. In wallstreetbets terms, this means that as the value of your position changes, you need to change your hedges too. The idea is to efficiently and continuously distribute and rebalance risk across different states and periods, taking value from states in which the marginal cost of the hedge is low and putting it back into states where marginal cost of the hedge is high, until the shadow value of your underlying exposure is equalized across your positions. The punchline, I guess, is that one static position is a hedge in the same way that the finger paintings you make for your wife's boyfriend are art - it's technically correct, but you're only playing yourself by believing it. Anyway. Obviously doing this as a small potatoes trader is hard but it's worth taking into account. Enough basic shit. So how does this work in markets? 2. A Hedging Taxonomy The best place to start here is a practical question. What does a business need to hedge against? Think about the specific risk that an individual business faces. These are legion, so I'm just going to list a few of the key ones that apply to most corporates. (1) You have commodity risk for the shit you buy or the shit you use. (2) You have currency risk for the money you borrow. (3) You have rate risk on the debt you carry. (4) You have offtake risk for the shit you sell. Complicated, right? To help address the many and varied ways that shit can go wrong in a sophisticated market, smart operators like yours truly have devised a whole bundle of different instruments which can help you manage the risk. I might write about some of the more complicated ones in a later post if people are interested (CDO/CLOs, strip/stack hedges and bond swaps with option toggles come to mind) but let's stick to the basics for now. (i) Swaps A swap is one of the most common forms of hedge instrument, and they're used by pretty much everyone that can afford them. The language is complicated but the concept isn't, so pay attention and you'll be fine. This is the most important part of this section so it'll be the longest one. Swaps are derivative contracts with two counterparties (before you ask, you can't trade 'em on an exchange - they're OTC instruments only). They're used to exchange one cash flow for another cash flow of equal expected value; doing this allows you to take speculative positions on certain financial prices or to alter the cash flows of existing assets or liabilities within a business. "Wait, Fuzz; slow down! What do you mean sets of cash flows?". Fear not, little autist. Ol' Fuzz has you covered. The cash flows I'm talking about are referred to in swap-land as 'legs'. One leg is fixed - a set payment that's the same every time it gets paid - and the other is variable - it fluctuates (typically indexed off the price of the underlying risk that you are speculating on / protecting against). You set it up at the start so that they're notionally equal and the two legs net off; so at open, the swap is a zero NPV instrument. Here's where the fun starts. If the price that you based the variable leg of the swap on changes, the value of the swap will shift; the party on the wrong side of the move ponies up via the variable payment. It's a zero sum game. I'll give you an example using the most vanilla swap around; an interest rate trade. Here's how it works. You borrow money from a bank, and they charge you a rate of interest. You lock the rate up front, because you're smart like that. But then - quelle surprise! - the rate gets better after you borrow. Now you're bagholding to the tune of, I don't know, 5 bps. Doesn't sound like much but on a billion dollar loan that's a lot of money (a classic example of the kind of 'small, deep hole' that's terrible for profits). Now, if you had a swap contract on the rate before you entered the trade, you're set; if the rate goes down, you get a payment under the swap. If it goes up, whatever payment you're making to the bank is netted off by the fact that you're borrowing at a sub-market rate. Win-win! Or, at least, Lose Less / Lose Less. That's the name of the game in hedging. There are many different kinds of swaps, some of which are pretty exotic; but they're all different variations on the same theme. If your business has exposure to something which fluctuates in price, you trade swaps to hedge against the fluctuation. The valuation of swaps is also super interesting but I guarantee you that 99% of you won't understand it so I'm not going to try and explain it here although I encourage you to google it if you're interested. Because they're OTC, none of them are filed publicly. Someeeeeetimes you see an ISDA (dsicussed below) but the confirms themselves (the individual swaps) are not filed. You can usually read about the hedging strategy in a 10-K, though. For what it's worth, most modern credit agreements ban speculative hedging. Top tip: This is occasionally something worth checking in credit agreements when you invest in businesses that are debt issuers - being able to do this increases the risk profile significantly and is particularly important in times of economic volatility (ctrl+f "non-speculative" in the credit agreement to be sure). (ii) Forwards A forward is a contract made today for the future delivery of an asset at a pre-agreed price. That's it. "But Fuzzy! That sounds just like a futures contract!". I know. Confusing, right? Just like a futures trade, forwards are generally used in commodity or forex land to protect against price fluctuations. The differences between forwards and futures are small but significant. I'm not going to go into super boring detail because I don't think many of you are commodities traders but it is still an important thing to understand even if you're just an RH jockey, so stick with me. Just like swaps, forwards are OTC contracts - they're not publicly traded. This is distinct from futures, which are traded on exchanges (see The Ballad Of Big Dick Vick for some more color on this). In a forward, no money changes hands until the maturity date of the contract when delivery and receipt are carried out; price and quantity are locked in from day 1. As you now know having read about BDV, futures are marked to market daily, and normally people close them out with synthetic settlement using an inverse position. They're also liquid, and that makes them easier to unwind or close out in case shit goes sideways. People use forwards when they absolutely have to get rid of the thing they made (or take delivery of the thing they need). If you're a miner, or a farmer, you use this shit to make sure that at the end of the production cycle, you can get rid of the shit you made (and you won't get fucked by someone taking cash settlement over delivery). If you're a buyer, you use them to guarantee that you'll get whatever the shit is that you'll need at a price agreed in advance. Because they're OTC, you can also exactly tailor them to the requirements of your particular circumstances. These contracts are incredibly byzantine (and there are even crazier synthetic forwards you can see in money markets for the true degenerate fund managers). In my experience, only Texan oilfield magnates, commodities traders, and the weirdo forex crowd fuck with them. I (i) do not own a 10 gallon hat or a novelty size belt buckle (ii) do not wake up in the middle of the night freaking out about the price of pork fat and (iii) love greenbacks too much to care about other countries' monopoly money, so I don't fuck with them. (iii) Collars No, not the kind your wife is encouraging you to wear try out to 'spice things up' in the bedroom during quarantine. Collars are actually the hedging strategy most applicable to WSB. Collars deal with options! Hooray! To execute a basic collar (also called a wrapper by tea-drinking Brits and people from the Antipodes), you buy an out of the money put while simultaneously writing a covered call on the same equity. The put protects your position against price drops and writing the call produces income that offsets the put premium. Doing this limits your tendies (you can only profit up to the strike price of the call) but also writes down your risk. If you screen large volume trades with a VOL/OI of more than 3 or 4x (and they're not bullshit biotech stocks), you can sometimes see these being constructed in real time as hedge funds protect themselves on their shorts. (3) All About ISDAs, CDS and Synthetic CDOs You may have heard about the mythical ISDA. Much like an indenture (discussed in my post on $F), it's a magic legal machine that lets you build swaps via trade confirms with a willing counterparty. They are very complicated legal documents and you need to be a true expert to fuck with them. Fortunately, I am, so I do. They're made of two parts; a Master (which is a form agreement that's always the same) and a Schedule (which amends the Master to include your specific terms). They are also the engine behind just about every major credit crunch of the last 10+ years. First - a brief explainer. An ISDA is a not in and of itself a hedge - it's an umbrella contract that governs the terms of your swaps, which you use to construct your hedge position. You can trade commodities, forex, rates, whatever, all under the same ISDA. Let me explain. Remember when we talked about swaps? Right. So. You can trade swaps on just about anything. In the late 90s and early 2000s, people had the smart idea of using other people's debt and or credit ratings as the variable leg of swap documentation. These are called credit default swaps. I was actually starting out at a bank during this time and, I gotta tell you, the only thing I can compare people's enthusiasm for this shit to was that moment in your early teens when you discover jerking off. Except, unlike your bathroom bound shame sessions to Mom's Sears catalogue, every single person you know felt that way too; and they're all doing it at once. It was a fiscal circlejerk of epic proportions, and the financial crisis was the inevitable bukkake finish. WSB autism is absolutely no comparison for the enthusiasm people had during this time for lighting each other's money on fire. Here's how it works. You pick a company. Any company. Maybe even your own! And then you write a swap. In the swap, you define "Credit Event" with respect to that company's debt as the variable leg . And you write in... whatever you want. A ratings downgrade, default under the docs, failure to meet a leverage ratio or FCCR for a certain testing period... whatever. Now, this started out as a hedge position, just like we discussed above. The purest of intentions, of course. But then people realized - if bad shit happens, you make money. And banks... don't like calling in loans or forcing bankruptcies. Can you smell what the moral hazard is cooking? Enter synthetic CDOs. CDOs are basically pools of asset backed securities that invest in debt (loans or bonds). They've been around for a minute but they got famous in the 2000s because a shitload of them containing subprime mortgage debt went belly up in 2008. This got a lot of publicity because a lot of sad looking rednecks got foreclosed on and were interviewed on CNBC. "OH!", the people cried. "Look at those big bad bankers buying up subprime loans! They caused this!". Wrong answer, America. The debt wasn't the problem. What a lot of people don't realize is that the real meat of the problem was not in regular way CDOs investing in bundles of shit mortgage debts in synthetic CDOs investing in CDS predicated on that debt. They're synthetic because they don't have a stake in the actual underlying debt; just the instruments riding on the coattails. The reason these are so popular (and remain so) is that smart structured attorneys and bankers like your faithful correspondent realized that an even more profitable and efficient way of building high yield products with limited downside was investing in instruments that profit from failure of debt and in instruments that rely on that debt and then hedging that exposure with other CDS instruments in paired trades, and on and on up the chain. The problem with doing this was that everyone wound up exposed to everybody else's books as a result, and when one went tits up, everybody did. Hence, recession, Basel III, etc. Thanks, Obama. Heavy investment in CDS can also have a warping effect on the price of debt (something else that happened during the pre-financial crisis years and is starting to happen again now). This happens in three different ways. (1) Investors who previously were long on the debt hedge their position by selling CDS protection on the underlying, putting downward pressure on the debt price. (2) Investors who previously shorted the debt switch to buying CDS protection because the relatively illiquid debt (partic. when its a bond) trades at a discount below par compared to the CDS. The resulting reduction in short selling puts upward pressure on the bond price. (3) The delta in price and actual value of the debt tempts some investors to become NBTs (neg basis traders) who long the debt and purchase CDS protection. If traders can't take leverage, nothing happens to the price of the debt. If basis traders can take leverage (which is nearly always the case because they're holding a hedged position), they can push up or depress the debt price, goosing swap premiums etc. Anyway. Enough technical details. I could keep going. This is a fascinating topic that is very poorly understood and explained, mainly because the people that caused it all still work on the street and use the same tactics today (it's also terribly taught at business schools because none of the teachers were actually around to see how this played out live). But it relates to the topic of today's lesson, so I thought I'd include it here. Work depending, I'll be back next week with a covenant breakdown. Most upvoted ticker gets the post. *EDIT 1\* In a total blowout, $PLAY won. So it's D&B time next week. Post will drop Monday at market open.
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Hi everybody. Hopefully this post doesn't sound too rant-y but I'm pretty frustrated by the amount of info out there that I'm not able to pick up on. There just seems to be a million ways to do calculated expected move. Here's what I've gathered so far. There seems to be two general methods: First Method: IV-Based
One Standard Deviation Move = (P) (IV) (DTE/365)^0.5
where P = price, IV = annualized implied volatility, DTE = days to expiration  This means that there is a 68% probability that the stock in question will be between -1 and +1 sigma at the date of expiration, a 95% probability between -2 and +2, and a 99% probability between -3 and +3. Sometimes 250-252 is used instead of 365, which seems to be the case when DTE refers to market days until expiration. Is that correct? There are a number of ways to calculate IV. I would appreciate it if somebody could elaborate on which might be best and the differences between them:
ThinkOrSwim uses the Bjerksund-Stensland Model  - I assume this is the "annualized" implied volatility aforementioned, because it is an IV value assigned to the stock as a whole ... what does that mean? I thought IV values were only calculated for a specific option contract??
As an aside, ToS in particular confuses me because none of the IVs seem to correlate - Exhibit A
I thought I might look into how VIX was priced off of SPY , as an analog, and use it as a basis for finding IV for any other stock as a whole. I don't know where they got their formula from
Backsolve for IV using Black-Scholes . This would only gives one value for IV, which I think only applies to that specific option contract and not to the stock as a whole??
Some websites say to use the IV given that is closest to the desired time period  - of course I have no idea how the IV is calculated in the first place (Bjerksund-Stensland again? Black-Scholes?) What's the difference between using the IV of a weekly or a yearly option?
Brenner and Subrahmanyam  - understood that this seems to be just an approximation. Should I be looking at formulas from 1988, however?
A very big question of mine is why there is an implied volatility for the stock as a whole and an implied volatility for every other options contract. I can kind of understand it both ways - why should a later-expiry contract have the same IV as an earlier-expiry contract? On the other hand, why should they be different? Why isn't there just one IV for the stock as a whole? Second Method: Straddle-Based My understanding is that this is more used for binary events like earnings, but in general I've found two methods:
Expected Move = (0.85) (Front Month Straddle)  OR
Expected Move = (Price of Straddle close to Desired Time Period) / (Price of Underlying) 
I have no idea where  comes from and I can sort of understand 6 but not really. In the end, I'm just trying to be as accurate as possible. Is there a best, preferred method to calculating the expected move of a stock in a given timeframe? Is there a best, preferred method to calculating IV (I'm inclined to go with ToS's model simply because they're large and trusted). Is there some Python library out there that already does this? For a retail trader like me, does it even matter?? Any help is appreciated. Thanks!
In (Kolber's) view, (Adam) Smith was an unwavering ally of individual liberty and limited government, while never losing sight of the tendency for large vested interests to manipulate the system. (1) He believed that this tendency must be checked by institutions of government, while cautioning that those very institutions can become perverted in service to large vested interests, as has happened time and again.
The phrase, “Maximize shareholder value” is taught in many business schools as a guiding principle of management, if not an 11th Commandment. It creates what many managers consider to be a moral duty to perform any action necessary to raise the company’s market capitalization. It puts countless honorable managers in a difficult position, as it forces them to compromise between service to their employer and their broader values in life.
Smith's earlier book, Theory of Moral Sentiments is usually ignored, while his magnum opus, Wealth of Nations gets the plum reviews.
I wanted to share a few of my numbers, goals and priorities. Both because it's helpful for me to organize my goals and plans, and because the posts and comments on this sub have helped me out and I thought I'd chip in my 2 cents. Basic stats: 31M, married, wife the same age. My annual income (software engineer, large company) around 125k + 20k bonus + 5k stock + 4.5% 401k match + ESPP magic of 1.5% salary or more. Wife's salary around 105k with a 2% 401k match at a non-profit. No kids yet, just a dog. I started working the summer I was 16, for a nickel above federal minimum wage at the time, I think it was around $5.15 / hr. This was a miserable and yet incredibly enlightening experience. I realized I could make it on my own with hard work but I sure didn't want to be stuck there. I went to college, worked part-time and summers through school at only slightly better pay and less-miserable conditions. Wife and I were extremely fortunate to have had families who paid most of college (along with some scholarships and benefits), and we graduated with no debt. Real income started coming in after I graduated college with an engineering degree in 2007, starting salary was $65k. My wife and I lived basically as we had while in school, renting a cheap place, maxing out the 401ks and Roths, and saving a small amount of taxable income too. Here's my SSA reported earnings (pretty sure I had some W2 income in 2005, not sure why it's missing). Wife's salary has been just a little bit less than mine over the years as she has worked at non-profits and spent two more years in school. It's been just shy of ten years since we graduated and started working and saving. Here's Mint's (ragged) picture of our net worth as far back as Mint knows about. Their older data is incomplete, the early years are missing several accounts that we had, and there is a discontinuity around our house purchase last year as Mint can't be made to understand the date we closed on our house and how that corresponds to the dip in cash. Right now we're still maxing 401ks, maxing my HSA, and average maybe $2000 or so of taxable savings per month. I'll be getting my first bonus check from my current job this year, and plan to save basically all of it, plus all my stock options and ESPP. If everything goes smoothly I hope we can save well over $75k this year. I have a goal set in Mint to get to $1M in cash and investments, and if the market doesn't take a dive and our savings stay on track, I hope to get there by early 2018. Our major expenses are dog-care ($600/month), mortgage ($3300/month incl. taxes and insurance), and some travel. Our net worth breakdown: Assets:
$104k in cash. I plan to move maybe half into the market slowly this year.
$823k in investments. Only $135k in a taxable brokerage account, the rest is spread across IRAs and 401ks.
Paid around $800k for our condo last summer -- very high COL area but I have some confidence property values will hold up well here even if there is another big downturn. Mint uses Zillow for its property estimate, which has a more conservative $735k estimate. Oh well.
$4700 currently on the credit cards (paid in full every month, that is just the current balances outstanding). Balance is high at the moment as we've just booked flights and lodgings for our summer vacation.
$590k owed on the mortgage, out of the $600k initial. We bought a condo last summer, with a 30-year mortgage, 10-year fixed rate around 2.9%. I plan to pay the minimum monthly for the next 10 years while our rate is cheap, and if the bank jacks up rates on us at that point I hope to have enough saved and accessible by then to pay off in full.
I mentioned already my wife and I were helped out significantly by having undergrad paid for and graduating debt free. I received an inheritance of around $200k a few years ago which also explains our growth. I say this to be transparent about where our money has come from and not write some inflated baloney. With those caveats and explanations, here are some lessons I've learned along the way that I'd like to share.
Prioritize your physical health first. Yes my first advice is actually to spend money -- investing in yourself and your health. Even if you are young and without major problems, go to your yearly physicals and dentist appointments. Nobody likes going to the doctor, but not going ends up being much worse.
I am in decent health, but I would gladly pay every dollar in all my retirement accounts to have my few health problems solved for good and be guaranteed a long, healthy, active life. In my case, that's not possible. Doctors can only do so much. Some of your health is decided by luck and genetics. But control the part that you can control -- lucky for all of us, it's usually a pretty large part. Eat your fresh fruits and vegetables, exercise, and don't eat out all the time -- not primarily because eating out is expensive, but because your health cannot be bought at any price, and making food yourself will simply be better for you.
Prioritize your mental health, happiness, and sanity second. Having a 90% savings rate will do nothing for you if you are depressed and suicidal. If you don't live long enough to enjoy your early retirement, all those years and decades of hard work were a waste. I'd much rather see someone making the bare minimum 401k contributions, with a job he enjoys, good friends, family support, loving spouse, than see an isolated and depressed wage-slave, spending all his time at a job he hates in a depressing environment, just to max out savings.
In fact, I see the entire idea of "financial independence" as a small part of a larger picture: determining what your priorities are in life, what really makes you happy now and will make you happy long-term, and then consciously investing your time, energy, and money to those pursuits. And cutting back on everything else. Build the life you want, then save for it
I can't tell you the number of posts I see on personalfinance where the biggest obstacle boils down to "I paid way too much for a new car I can't really afford and now I'm in big trouble". What's worse, the people that post are the ones smart enough to realize something is wrong and reach out for help, I worry about the rest.
I live in a New England city where a big snowfall will regularly bury us for a week or two at a stretch in the winter. It is mind-boggling the number of cars I see here, weeks after a snowstorm, still parked on the street completely buried by snow -- the owners have more cars than they need, so what the hell, just leave the extra cars abandoned on the street (for "free" of course), buried in the snow. Car insurance for me and my wife here costs, for one car, north of $1k/year and we both have spotless driving records. Plus motor vehicle excise tax, registration, emissions test, plates, AAA, etc. And those are just the fixed costs, without putting any miles on the car! I am simply astounded by these abandoned cars hanging out for weeks.
Buy a damn bicycle and start somewhere. The number of excuses I hear about why one can't bike is just insane. Work is too far, it's too cold, too wet, too dangerous, I'm out of shape, I don't have a bike, I don't really know how to bike, bikes get stolen, I'll get sweaty, and on and on. Look. Go to your local bike shop, or Craigslist, or hell even Walmart. Spend $150-$200 on a used or (crappy) new bike. Get a helmet and maybe a lock. And just try going somewhere on a nice cool, sunny day. Go to a coffee shop, park, bookstore, post office, whatever. You lock up basically anywhere. No coins or credit card for the meter, no circling for parking. Time how long it took you. If it's somewhere close, and you live in a city, it probably wasn't much slower than driving and dealing with parking, maybe even faster. And remember how infuriating it is to be stuck in a car in a traffic jam? That will never happen to you on a bike.
Commuting to work every day by bike may not be for you. Maybe you can do it on nice days in the spring and fall. Maybe you can do a few errands here and there. Maybe just for fun rides on the weekend. Read the true cost of commuting by the great Mr. Money Moustache if you want financial motivation. I wonder if I have MMM beat with my bike commuting stats ? But just try riding a bike a few times and see how you like it. If you hate it, fine, it's not for you.
Spend some time getting VERY familiar with your work benefits. It is easy to miss out on free money. A few examples from my own experience:
If you have an employer match, be careful about front-loading your 401k contributions, even just a little bit, e.g. meeting the 401k contribution limit by November in the year. Depending on how it is set up, the match may only kick in, say, up to a 5% match of each pay period. So if you front-load and are maxed out by November, you would have only gotten a 5% match for 11 months, not 12 months.
If you have an employer HSA and your employer is generous enough to have incentive programs to reward you with money for exercise, preventative care, health counseling, etc. get on top of those and max them out. It's free money!
The workplace ESPP plans I've had access to are also free money (often a 15% guaranteed ROI after 6 months if company stock is flat or goes down, with the potential for much more if the company stock goes up). You are crazy if you don't contribute the full amount here.
Be on the lookout for other fringe employee benefits. We recently found out my wife's work offers reimbursement up to $20/month for bicycle commuting expenses. Ka-ching.
Understanding the details of your vacation policy (PTO) is critical. How often do they accrue? Do you have other days ("floating holidays") and how are they different? What is your cap on the max. number of days accrued? Do they roll-over year to year? Do they get paid out when you leave the company? Time is money, these days are precious, don't waste any of them.
On the same lines, the easiest credit card sign-ups and bank sign-ups are no-brainers, great money for a minimal time investment. You don't have to go overboard like the hardcore folks at churning , but just signing up and canceling one or two cards per year can net you an easy $200-$500 bonus each time. Even better, the credit card bonuses are generally treated as discounts on purchases, not income, so not treated as taxable income by the IRS.
Make a to-do list of financial fixes, bill cuts, home improvements, and work on them regularly. My quick list is:
rollover wife's old 401k to an IRA
set up a backdoor Roth for me and my wife this year
do an easy credit card sign-up bonus
take advantage of a state program to pay for insulation in our house
Think about what makes you happy and do more of it. Stop for a moment and ponder -- what are the top three things that you love doing, that when you are old and grey you will look back fondly on?
I bet that "compulsively checking Facebook" wasn't on your list. Or "sitting in traffic on the way to work". Financial Independence is all about taking control of your life. But you don't need some magic amount of money saved to do this. Being financially independent is more of a spectrum than a binary. Just having a small emergency fund saved will give you confidence at work, give you flexibility to interview for other jobs, allow you to sleep better at night, invest in yourself, etc.
And after taking care of yourself and your immediate family, think about your other close friends and more extended family (well, the ones you love, at least). Just as our families have sacrificed for us, I see my extended family members who have needed help over the years and have tried to help out quite a bit, financially and otherwise. This is actually what I look forward to the most as our nest egg slowly fills in. I don't want to be a Scrooge sticking to a leanfire budget for 40+ years of retirement with no wiggle room. I aspire to be able to help friends, family, and charities I care about.
Elites "Going Rogue" Suggests The Global Neoliberal Architecture Is Collapsing (UK) by Michael Every via Rabobank (article full quote, with added links, annotations, Sep.2.2019)
this article a hot news item Aug.28++ Rabobank | wkpdMichael Every Listen carefully. (kerplop, rogue-fish heading for open water) That is the sound of going rogue – and bond yields further through the floor. Yesterday UK PM Boris Johnson (BoJo) announced he is going to prorogue– or close– Parliament, meaning that when MPs come back to sit next this week they will only do so briefly, and will then not return until 14 October, when there will be a new Queen’s Speech to launch BoJo’s slate of legislation as the new PM. So far, so technical. Yet what this effectively means is that there will be a very narrow window next week, and then a slightly larger one in the final two weeks of October, for Parliament to act to prevent Hard Brexit on Halloween. This is explosive and unprecedented stuff, politically. The British constitution is largely unwritten and so allows wiggle room, and the government insists they have checked the legality of all they are proposing; nonetheless, as the press and opposition note, it smells awful. This is clearly a case of Erskine May (the ‘parliamentary bible’ that looks and sounds like it belongs in a Harry Potter tale) turning into Erskine Maybe or Erskine Might. Indeed, BoJo is being accused of a “coup”, a “constitutional outrage”, an “abomination”, and of being a “tinpot dictator”, though this being the UK, perhaps that should be “teapot”; but there is not just tea but a genuinely revolutionary atmosphere brewing. Bob Kerslake, former head of the civil service, is quoted in the Guardian as stating:
“We are reaching the point where the civil service must consider putting its stewardship of the country ahead of service to the government of the day.” Lord Kerslake said.
…the global neoliberal architecture collapsing, and perhaps taking some liberal-democratic architecture with it.
If you think that is hyperbole, consider this benchmark – how would we be reacting if the armed forces in any country were saying what Kerslake and Dudley just suggested? (go rogue) This is not going to change for the better until we get a global new paradigm emerging – and that is a long way off. (Yes, Italy might cobble together a Europhile-PD/Europhobe-5 Star government, but how sustainable is that going to be, and will 5 Star’s party members support it? (not likely) None of this is to take a stance on what any particular executive or legislature is doing on any particular policy front. Rather, it is an analytical view of how bitterly, deeply divided many countries are between a status quo ante, with its neat technocratic rules and regulations, and a populist backlash from those who feel these no longer provide a path to what they used to have and still want. One can argue “executive vs. legislature” or “executive vs. gate-keepers”; yet when the executive speaks of the “will of the people” as its justification it gets very Hannah Arendt very fast. Equally, however, what if the legislature and gate-keepers really are refusing to recognise the need for wrenching populist change, no matter how painful short term? One can argue it left and right and back and forth – but ultimately we will need to see a winner. And that is what markets need to focus on: not who is ‘right’, but who wins and what that means. So back to the practicalities of Brexit. Parliament has only a few options: sit in another location and call themselves Parliament regardless of the prorogue – is that legitimate or also a dangerous precedent?; pass a law which would cancel the proroguing, which ironically would have to be signed by the Queen who just signed off on the prorogue; call for judicial review of the proroguing, which is on shaky ground according to government lawyers; pass a law to repeal Article 50, which would trigger an inverse political crisis as large as what BoJo is doing; or call a vote of no confidence in BoJo… at which point figures close to him have stated he will wait the allotted 14 days and then dissolve Parliament for new elections… AFTER the Brexit deadline of 31 October. In short, this is all likely to come to a neo-Cromwellian (classic rogue reprised) head next week (early Sep), and Hard Brexit odds are right up there with an election leading us back to the same Revoke vs Hard Brexit binary. What was the market reaction to the UK heading into such deep, dark waters? GBP initially sold off and then recovered to hold around $1.22 (USD). Hardly an emerging market seeing meltdown; by contrast, look at what happened to the Argentinean Peso (ARS) yesterday (Aug.27), which is currently around 58 perUSD when it started the year at below 38. Likewise, Gilt (bond) yields declined 2bp (basis points) at the short end and 6bp at 10(year)s and 5bp at 30(year)s. That is hardly the reaction to a country about to implode and default. (Low yields mean high prices, ergo investor confidence in lasting value.) Then again, it is hardly a ringing endorsement of the economic outlook either… which, together with US 10(year)s (Treasury Bonds) at 1.46% (yield) and German 10(year)s at -0.72% explains why we are crashing through our self-made Thin Ice in the first place. That and the fact that China continues to slow due to its vast self-made problems, according to the Bloomberg Economics gauge. On which final note, today’s CNY fixing was $7.0858, again slightly lower than the previous day, but again much stronger than where the fix was implied ($7.1085) and where the market currently is at $7.1652. That’s another piece of neoliberal convention going rogue – the PBOC is saying something, markets are saying otherwise,… and nothing is happening to them (PBOC) as a result. (emphases in original) New World Order In Meltdown Aug.31 | 0hdg update Sep.4 Boris Johnson defeated over Brexit strategy Sep.4.19 8 min | StraitsTimes background videos on Brexit Sean (SGTRpt) interviews Brit "Daddy Dragon" (Graham Moore), Brexit became law Mar.29, and J Assange will be safe in Britain 25 min Brexit: Government may ignore legislation to stop No-deal says Gove 14.3 min
As MPs opposed to a No Deal Brexit prepare to try and thwart it in Parliament, the government has launched a £100 million advertising campaign, urging people to "Get Ready for Brexit".
Hi everyone, I've been working on a project for my Bachelor Thesis in Finance with Python for quite a while now and I'd love to have some feedback from you. The project focuses on Option Pricing using the Black Scholes Model for Plain Vanilla and Binary Options. It allows the user to perform a series of tasks like computing and plotting greeks, option payoffs and the implied volatility surface and skew. The script requires Chrome and quite a few modules to properly work, and the code is macOS native, meaning that it may not work on other operating systems (sorry for that). My go-to IDE is PyCharm, but I guess any other IDE will work fine. Here you can find the link to the GitHub repository where the project is located. I will leave also some links to resources about all the theory behind the computations I do in the project for the ones that are not familiar with this topic. Options Theory) Black-Scholes Model Binary Options Greeks) Options Strategies Implied Volatility Volatility Smile (Skew) If you have any question let me know. Thank you!
Regarding CFTC Commissioner Brian Quintenz's remarks on smart contract regulations...
Want to regulate smart contracts? Good luck. If it seems like policymakers are flummoxed by the rise of cryptocurrencies, wait until they get to smart contracts. Just ask Brian Quintenz, commissioner for the US Commodity Futures Trading Commission. At a conference in Dubai this week, Quintenz expressed a sense of awe at the vast unknown that blockchain-based computer programs have created for his agency. The CFTC oversees commodity futures and swaps markets. Since 2015, when the agency designated Bitcoin a commodity, its purview has included markets for cryptocurrency derivatives. Quintenz gave a specific example of a smart contract that falls within the agency’s jurisdiction: a prediction market that lets users bet on the future price of a commodity. The CTFC sees that as a kind of derivative called a binary option, and before a binary option can be listed it must be registered with the CFTC, he said. That seemed like a clear reference to markets that have already appeared on Augur, the Ethereum-based platform that allows users to set up markets for betting on the outcome of future events. (see “This new blockchain-based betting platform could cause Napster-size legal headaches”) In the past, the CFTC has been able to build its regulatory structure around market intermediaries that must register with it. That won’t work in the world of decentralized blockchain networks, Quintenz said. “How can our regulatory apparatus, built to register and oversee intermediaries, adequately police our markets and set standards for a disintermediated market?” Who should be held accountable for an unregistered binary option, for example? In some cases it might be appropriate to prosecute those who developed the smart contract code, Quintenz said. He dismissed the argument that the developers aren’t liable since they have no control over what users do with the protocol they created—which is how Augur’s creators have responded to questions about the potential of illegal activity on their platform. But prosecuting the code’s developers won’t get rid of the code, which runs on a blockchain network. So what should the CFTC do if users keep listing illegal contracts? Quintenz concluded his speech on smart contracts with a Carl Sagan quote that he said he finds poignant: “[W]e live in a society dependent on science and technology, in which hardly anyone knows anything about science and technology.” You can say that again, Commissioner.
Herbalife will either survive or die [HLF] - Buying LEAPs
With all the brouhaha surrounding Herbalife, I figured it was time to dig in and see if there's a good risk/reward opportunity with the recent price dive. The biggest asset for HLF in my opinion is not PP&E or anything tangible but the brand itself. It has been around for 30+ years and spends hundreds of millions in advertising its name around the globe. The brand of HLF possesses the earning power. A quick look at the balance sheet reveals total assets of $1.6 Billion; subtracting Net of Goodwill & Intangible ($400 million), we have $1.2 billion of net assets. Liabilities are at $1.25 billion. Which means if the company were to shut down tomorrow, there is nothing left for equity holders. Here is are two conservative scenarios:
The company will be shut down in ALL countries and die tomorrow - in which case Equity has zero value.
Company will weather the storm but stop growing.
We calculate owner's earnings (going by Buffett's definition) for last 12 months: Cash from operations + depreciation - Cap Ex = 516 + 73 - 93 = $496 Million which means owner's earnings of $4.62 per share ($496 million/108 million shares outstanding) For discounted cash flow calculations we assume $4.62 annual owner's earnings per share, an aggressive 14% discount rate and terminal growth rate of 3% (USA's annual inflation rate), we arrive at $43.26 per share intrinsic value. The third possibility is status quo as far as operations are concerned - that company will not only weather the storm but will continue to keep growing at the current 10%+ rates. But I don't like to bet solely on optimistic projections. Again, I see this as a binary play - either the company should exist and will exist because people wrongly confuse it MLM's with Pyramid schemes, or this entire operation is a sham that will be shut down. This reminds me of Jamie Mai and Charlie Ledley's trade from the Big Short where they bought LEAPs (long term call options) on Capital One and got a 20x return. I'm looking at Jan 2014 and Jan 2015 LEAPs. Any thoughts? TL;DR: If you think the company won't die from the face of this earth, I think it might be a very attractive buy at $33. I'm still watching. Disclaimer: This is for educational purposes only. Do your own research and make your own investment decisions. This is not a recommendation to buy or sell. I have no position.
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ECN. Used most by professional traders. Difficult platform for beginners
Minimum deposit $10000 (or $3,000 if under 25yo) * Well diversified -Oanda
Market maker. Second largest retail FX brokerage in the US. Easy platform for beginners.
No minimum deposit
Not well diversified, but well capitalized -Gain Capital (whitelabel forex.com) *Market Maker *Fair spreads *Minimum deposit $250 *Well diversified -FXCM Inc
ECN. Largest retail FX brokerage in the US
Minimum deposit $2000
Not well diversified. CAUTION: FXCM nearly went bankrupt in Jan-2015 due to a lack of diversification and low capitalisation. As a result FXCM LLC was bailed out with a large loan which may prove difficult to pay back. Be warned that their business may not be sustainable in the long term. -MBTrading
ECN. Mid-sized retail FX brokerage
Minimum deposit $400
International Only- -LMAX (whitelabel DarwinEx) *DMA broker based in the UK. Note that as a DMA broker LMAX eliminates the ability for LPs to last-look transactions. This may result in reduced liquidity during volatile times as liquidity providers would be likely not to risk posting liquidity to LMAX's pool. *Tight spreads *Minimum deposit $10,000 *Fairly well diversified -Dukascopy *ECN based in Switzerland, but available elsewhere depending on local regulations. *Tight spreads *Minimum deposit $100 *Fairly well diversified -IC Markets *ECN based in Australia *Fair spreads on standard account, tight spreads on professional accounts. *Minimum deposit $200 *Fairly well diversified -Pepperstone *ECN broker based in Australia. *Fair spreads on standard account, tight spreads on professional accounts. *Minimum deposit $200 *Not well diversified Software / Apps: Desktop/mobile
Apps are typically broker dependent. Some brokers have their own proprietary software, while others lease common software like Metatrader or NinjaTrader. Some software has a large development community for indicators and EAs.
Terminology/Acronyms: www.forexlive.com/ForexJargon - Common terms and acronyms FAQ: I need to exchange money, how do I do it? This isn’t what this sub is for. Your best bet is using your bank or an online exchange service. Be prepared to pay a hefty fee. I have money in one currency and need to exchange it into another sometime in the future, should I wait? Don’t ask us this. We speculate intraday in FX and shouldn’t be relied on to tell you what’s best for you. Exchange the money when you need it. I have an FX account, should I start trading demo or live? This is highly debatable. You should definitely demo trade until you have mastered how to use the trading platform on desktop and mobile. After that it’s up to you. Many think that the psychology of trading live vs demo trading is massively different. So it may pay to learn to trade live. Just be warned that most FX traders lose almost their entire first account so start with a low affordable balance. What’s money management? Money management is a form of risk management and is arguably the most important aspect of your trading when it comes to long term survival. You should always enter trades with a stop loss - the distance of the stop allows you to calculate how large of a percent of your account balance will be lost if your trade stops out. You can run a monte carlo simulation to figure out the risk of having a number of trades go against you in a row to drain your account. The general rule is that you should only risk losing 1-4% of your account per trade entered. More on this here: www.investopedia.com/articles/forex/06/fxmoneymgmt.asp www.swing-trade-stocks.com/money-management.html What about automated trading? Retail FX traders have been known to program “Expert Advisors” (EAs) to automate trading. It’s generally advisable to stay away from that until you’re very experienced. Never buy an EA from a developer because the vast majority of them are scams. What indicators are best? That’s up to you to test and find out. Many in this forum dislike oscillating indicators since they fail to capture the essence of what moves price. With experience you will discover what works best for you. In my experience indicators that are most popular with professional traders are those that provide trading “levels” such as pivot points, fibonacci, moving averages, trendlines, etc. What timeframe should I trade? Price action can vary in different timeframes. In longer term timeframes the price action and fundamentals are much more clear. Unfortunately it would take a very long time to figure out whether or not what you’re doing is successful on longer timeframes. In shorter timeframes you can often tell very quickly if what you’re doing is profitable. Unfortunately there’s a lot more “noise” on these levels which can prove deceptive for those trying to learn. Therefore the best bet is to use a multi-timeframe analysis, working from top-down to come up with trades. Should I trade using fundamental analysis (FA) of technical analysis (TA)? This is a long standing argument in these forums and elsewhere. I’ll settle it here - you should have an understanding of both. Yes there are traders who blindly ignore one of the other but a truly well rounded trader should understand and implement both into the analysis. The market is driven in the longer term through FA. But TA is necessary to give traders a place to enter and exit trades from a psychological risk/reward standpoint. I’ve heard trading Binary Options is an easy way to make money? The general advice is to stay away from binaries. The structure of binary options is so that when you lose the broker wins. This incentive has created a very scammy industry where there are few legitimate binary options brokers. In addition in order to be profitable in binaries you have to win 55-65% of the time. That’s a much higher premium over spot FX. Am I actually exchanging currencies? Yes and no. Your broker handles spot FX is currency pairs. Although they make an exchange at the settlement date they treat your position in your account as a virtual currency pair. Think of it like a contract where you can only buy or sell it as a pair. In this sense you are always long one currency while short another. You are merely speculating that one currency will appreciate or depreciate vs another. Why didn't my order fill? Even if price appears to cross over a line on your chart it does not guarantee a fill. Different charting platforms chart different prices - some chart the bid price, some the ask price and some the midpoint price. To fill a limit order price needs to cross your limit's price plus the spread at the time that it is crossing. If it does not equal or exceed the spread then it will not fill. Be wary that in general spreads are not fixed. So what may fill at one time may not at another.
Every time I look up for binary options, there seems to be no escape from people who advertise it. Why?
Try looking up binary options on Twitter. Full of people shilling it. Try looking up binary options on Google. Majoreliable sites might exist at the first (Wikipedia, Forbes, Investopedia, plus the U.S. SEC/CFTC warnings) - but rest of them are just spammy/shilling (especially the so called "reviews", which for binary options, I don't trust at all). Why? I noticed this also happens with work-at-home schemes (often largely scams).
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