4th Round

I am this close to making something happen. More tomorrow...

Timely

So far, the options trade I put on the other day hasn't worked out that well. I managed to find the only semiconductor company in the entire world that didn't miss earnings. Oh well, I still have 2 more expiration cycles - no point in trading out of it now, and I still think my thesis is correct.

On the positive side, I just barely avoided taking a loss on Friday. I'd been looking at some upside calls on SkyWest due to an upcoming event. Continental Airlines was looking to replace ExpressJet as their subcontractor for short-hop flights. The contract had orignially gone to RJET but, due to a series of complicated events involving subleases and availability of planes, the contract needed to be re-awarded. I recently spoke to an industry analyst, who said that since RJET didn't have the planes, it was almost a given that the contract would go to SKYW.

Since the contract was due to be awarded any day now, I figured some upside calls in SKYW would be a good idea. With the stock around 23.5, maybe some cheap 25 calls would be worth a shot. Unfortunately, Friday was expiration. The Julys were trading as if worthless, and I really didn't want to pay up 0.35 for the Augs. If we only got a small move in the stock, vol would collapse and I'd barely make any money. Not worth it. If I could pay 0.20 or 0.25, I'd probably try to buy 100 calls.

Just as I was cursing the timing of the whole trade, and debating whether dropping a 0.25 bid for the Augs would get hit out or just scare away the offers, one of our salesguys called out "CAL on the tape!" "Shit," I thought, "I just missed it." I pulled up the story on my newswire.

Continental Airlines Selects Unit Of Republic Airways For Regional Jet Contract

Guess that's $2500 back in my pocket.

Odds and Ends

For a so-called derivatives trader, I've really been a spectator in the options market for quite a while. A lot of that has to do with my current job - I've been trading a lot of equity-based derivatives that are internally structured and which don't have any characteristics of traditional derivatives. It's also because, when I left the AMEX, I was very frustrated with the state of my trading. Some of it was because the AMEX was a giant black hole of spiralling depression where trading careers go to die. Some of it also was the realization that TASR was dead and was never coming back - no more $100,000 weeks ever again. And, maybe most importantly, some of it was because I felt like I had lost my edge. I wasn't excited about trading any more. I felt like I was going through the motions, like I didn't care whether I made or lost money.

To traders, this is the kiss of death. We love to win. No, really, we need to win. Ever play a board game with a trader? It's not fun, is it? We gloat when we're up, and refuse to admit defeat when we're down, even if the odds of a turnaround are so long we make the NY Knicks look like they have a good shot of winning the championship this year. We simply love winning so much at trading that it takes control of anything else competitive in our lives.

When I stopped caring about winning at trading, I knew I had to leave. I left the floor and got a job that I hoped would be intellectually stimulating and, maybe, rekindle that flame. While the job itself hasn't turned out to be as exciting as I'd hoped, some of the people I've worked with have reminded me about that competitive desire. I broke myself down, and started back at the beginning, with simple equity plays. I tried a few experiments, made a few mistakes, and got a little lucky.

But oh that feeling when I hit that first home run again. PWEI - I was in that name before Cramer had even heard of it. Long from $7.14 right before the run-up. I was back, dammit. It was like a drug - but better. I nailed on the head. My coworkers, who I'd told to get in on the name, were cheering me on for weeks after that one.

For the next year or so, my trading in my personal account picked up a lot. I had winners and losers, but overall I perfomed well. My confidence was back; I found my swagger. And today, for the first time since leaving the AMEX, I slapped on an options trade.

Nothing too exciting. Just bought a put spread in a name that I think is due for some disappointing earnings later this week. Still, it felt good. I could tell, though, that I'm a little rusty. I didn't check the vols before pulling the trigger, nor did I look at the earnings cycle to see how many shots I get. Still, it was a good feeling to be back in the game.

IPO Dude

This morning The NY Merc filed an S-1 with the SEC. The long-awaited IPO is finally moving forward. The stock is expected to trade on the NYSE, ticker symbol NMX. I have a more than passing interest in this particular name, as some of you know, and I've been waiting for this news for a while.

So what's this thing really worth? While it's still too early to talk pricing, NYMEX shares are already changing hands in the neighborhood of $40, so we have a decent starting point. Unfortunately, we don't know how many additional shares, if any, the Merc plans on issuing as part of the IPO. Thus, we can't really come up with a price target. We can, however, talk about multiples, to some extent. Comparing the NYMEX to its peers, (CME, BOT, ISE, NYX, NDAQ,) we get an average P/E ratio of 85.17 - pretty rich. The NYMEX shares are currently trading at about 44 times, so in theory, the exchange could double the shares outstanding on the IPO and still be in line with the average of its peers.

On the other hand, the peer average EV/EBITDA ratio is about 22.69 times - very high by any standard. Using a back-of-the envelope calculation, I get to a current value of about 21x for the NYMEX as is. Granted, this number will change dramatically, as the exchange will see a significant influx of cash after the IPO, but presumably also see its market cap soar.

The upshot of these quick calculations is primarily that exchanges in general have very rich valuations. Perhaps this is justified, since these companies have always been privately held up until now, and it's likely there will be significant improvements in margins as well as growth as the pressure of being public forces management to become more aggressive. Perhaps not.

Talking Trading: New ETFs

There's been a lot of buzz on the street recently about a series of new ETFs from ProFunds Group. These new Proshares allow the investor to take a leveraged bet on the major indecies on either the long or short side. Very interesting stuff. I can tell already that the portfolio theorist in me is going to have an absolute ball with these puppies. Aside the obvious ramifications of being able to be short the market as well as to generate leverage in an IRA for the first time in history, there are several hypotheses I'm hoping to play around with. While there is still nowhere near enough data to work with, I am planning on quite a bit of number-crunching. Some hypotheses include:

• Taking advantage of outlier days - if the UltraQQQ, for example, really produces double the return of the regular QQQ on a consistent basis, can one buy the UltraQQQ and short the regular QQQ in order to take advantage of higher volatility? Should one hedge with 2 QQQ contracts for every one UltraQQQ? Is there a correlation with the VIX?
• If, as many retail brokerages like to claim, the market historically returns 9-10% annually, shouldn't we all just throw 100% of our portfolio into the UltraQQQ and, in the long run, earn a rate of return that is significantly higher than the rate of inflation, allowing us to retire quite comfortably on our own private islands somewhere?
• Are there arbitrage opportunities between the Ultra long and Ultra short ETFs?
• If the market has a huge runup, similar to the Nasdaq circa 1999-2000, does the UltraShortQQQ go to zero?

A lot of these questions would be easy enough to answer via Monte Carlo Engine if we knew the exact methodology that ProFunds uses to price these ETFs. For now, all I've seen is that the pricing is determined through the use of various derivative products that may include futures, swaps, and other instruments, and that there is no guarantee that the actual value of the ETF will really be equal to what it should be. Acting on the assumption that the Ultra ETFs will behave exactly as they should can give me a decent idea of what to expect, but I'd rather be able to back-test with actual data. (I am well aware that backtesting can often turn into "backfitting" the data, but I am also a very firm believer that markets are neither perfectly rational nor perfectly efficient, and these mysterious derivatives that ProFunds is using to reach the expected levels for its Ultra funds sounds exactly like the sort of thing that will make spreads get all sorts of funky because actual values and theoretical values don't quite add up.)

Anyway, these new ProShares look pretty interesting, and not just from an academic standpoint. If business is as slow tomorrow as it has been all month, I should have plenty of time to mess around with these things.

Doomed

As it becomes more and more apparent that the manufacturing industry in America is becoming a thing of the past, various political and economic pundits have lamented the coming woes of our nation. "Not to worry" say some of these experts. We will merely shift from a manufacturing to a service-based economy. To these so-called experts, I ask: have you actually attempted to use any of these services? Have you actually spoken to a customer service representative in the past decade? Have you even tried to deal with any so-called service providers recently? Tried to, say, cancel your AOL account or, maybe, fix your cable? The survival of our country depends on a shift to a service-based economy? We're doomed.

In other news, today's interview was re-scheduled yet again. Interesting how, last time, I was lectured on the timeliness of merger-arbitrage, and how the window of opportunity for such trades is usually no more than a few days. By the time I actually get in there for the next round, the deal in question will probably have closed.

Another Follow Up

I finally got in touch with the hedge fund guy. Even though he wanted the project done a week ago Monday, he won't be able to actually meet with me again until a week from this coming Wednesday. It is apparent to me that either: a) he's not really interested in hiring me, because if he were, he'd be a lot more motivated about getting me back into the office; or b) he's so disorganized and scatterbrained that I don't want to work for him. Right now I'm thinking it's a little of both, but probably leaning more towards column a). However, at this point, I don't think I'm particularly interested in working for him either. If he were to give me an offer, which I'm really not expecting right now, I'd have to think long and hard about it before accepting.

In a totally unrelated point, 2Q is officially over. Performance of the equity markets for the year has been pretty lackluster, with a few standout areas. I'll have a full breakdown up here in a day or two, but so far it looks like if you weren't in oil stocks, gold stocks, or tranportation, you probably didn't have much success as an indexer. As my father said to me last night, this is a stock picker's market. If you're good at finding hidden value, (or just plain lucky,) you could have had a decent start to the year. If not, well, there's still 6 more months to go.