Friday, November 6, 2009

05/11: An ode to Metra. Also, markets jubilant; Dow re-crosses 10k. And, a brilliant evening at the symphony!

I make this evening’s post while comfortably ensconced aboard Chicago’s excellent commuter rail network, Metra. Before I commence the meat of this post, an ode to you, sweet Metra:

A maze of many lines, not modes, my Metra, a robust, reliable rail network you are! Rotund is your reach, and your rolling stock, too, has two levels of seating. But you run smooth, your pace swift as you race, kissing the rails. So superior are you to CTA, the sorry alternative, where shooters may silently lurk, which boasts interminable waits, where patrons are shuttled to sorry, sullied districts. Metra! Oh, an altogether amicable, amazing alternative! Brilliant, beautiful, the antithesis of belligerent bellicose; I beam when we blissfully be. So be!


Winding our way to Clybourn, I’m pleased to report that markets rallied strongly in today’s trade, with the S&P500 closing above 1060 and the DJIA settling just over 10,000, under which it hovered for most of today’s session. Today’s trade was an exuberant release of collective enthusiasm over yesterday’s Fed decision, after it sunk in during the overnight. Yes: monetary conditions are blissfully loose, and so they shall remain for a good, long while. There could not be a better cocktail for equities.

Forgive me, reader, for a dearth of supporting evidence (read: charts) to the above claims. You’ll just have to take my word for it. Or wait for tomorrow’s 10-day!

My own trade was positive today, as I have had a position of call options. Perhaps a bit of primer on these instruments is in order. Well then:

Options are a Chicago contract. Financial engineering, of which options contracts are a chief example, have a rich history in this trading capital of the then-developing world. Nineteenth-century Chicago traders began the financial alchemy heritage by refining the futures contract, a method for actual producers and consumers of various commodities to hedge their exposures to the risk of fluctuating prices. The hub for these instruments became the twin pillars of the Chicago financial establishment: the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME). Both still operate to this day!

Now flash forward a century. With the death of the worldwide gold standard in the early 1970s and the concomitant increase in the volatility of currencies, there became a market need for hedges against currency volatility. As with wheat or lean pork bellies, there were naturally short market participants (e.g. manufacturers and exporters in the home country) and naturally long ones (e.g. manufacturers and exporters in foreign countries). Hence, currency futures were born.

Not ones to miss a market opportunity, the whiz Chicago boys next set their sights on a hedge against volatility in equities: the humble options contract. An option is nothing but a contract that, when bought from a seller in exchange for a fee, gives the holder the right -- but not the obligation -- to buy or sell a particular security at a particular price, termed the strike price, on or before a particular date, called the expiration date. (A technical note: so-called “American” options can be exercised on or before the expiry date, as noted above; “European” options, in contrast, can only be exercised on the expiration date.) The term ‘option’ owes its name to the fact that its holder can either exercise the contract or allow it to expire sans exercise -- hence, there exists an inherent option. As with stocks, options have healthy trade on a secondary market, meaning that a trader need not take an options position with the aim of actually exercising it; instead, he can sell it prior to the expiry date, hopefully for a higher price.

But enough about options for the time being. Back to today's trade: my MOT and SLB calls both appreciated, and I sold those based on the shares of the former, mainly to trim risk exposure before tomorrow morning’s much-anticipated jobs report. I dare say that I should even have sold the remaining calls too, yet by holding them I can at least enjoy some upside if the jobs report pleases (but, of course, I’m also exposed to downside disappointment).

Here’s to hoping for a jobs number tomorrow morning better than negative 100k! And thoughts regarding tonight's (brilliant!) Chicago Symphony Orchestra performance shall have to wait until tomorrow; apologies!

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