Monthly Archives: July 2016

Hedging Risk Away with Ticker TZA

It pains me to say that I don’t know where the stock market is going next.  You would think that after being in the markets for so long and following a bunch of indicators and systems etc., that by now I would have developed some ability to divine what is coming next.

Alas, I have not.

But I do know three things:

*My trend-following stuff is bullish so I need to give the bullish case the benefit of the doubt (no matter how nervous or cynical I may be).

*Based on a variety of indicators the market is certainly getting overbought

*Based on the calendar, some caution may be in order

So, a thought today for those who might be wishing to hedge away some of their market risk.

Ticker TZA

Ticker TZA is not necessarily one of my favorites.  It is an ETF that tracks 3 times the inverse of the Russell 2000 small-cap     index. In other words, if ticker RUT falls 1% today then TZA should rise 3%.  There are two primary concerns to keep in mind before considering buying shares of TZA are:

*The shares are extremely volatile

*The shares have experienced a serious downside bias – even when RUT is headed sideways (See Figure 1).1Figure 1 – Ticker TZA (black bars) versus Ticker RUT (Russell 2000) (Courtesy AIQ TradingExpert)

So if you are going to buy TZA you’d better pick your spots. As I discussed here we are entering an “interesting” time for the market.  So let’s explore the possibility of buying a call option on ticker TZA as a hedge against a potential market decline.

Call Option on TZA

Remember, TZA should increase in value if the Russell 2000 declines.  Therefore, a call option on TZA should also increase in value if the Russell 2000 declines.

As you can see in Figure 2, the “implied volatility” (which generally tells you whether there is a lot of time premium built into the price of the options for a given security) for options on TZA is near the low end of the historical range.  This tells us that there is relatively little time premium built into TZA options, therefore they are “cheap”.2Figure 2 – Implied option volatility for options on TA near the low end of the historical range (Courtesy

Next I ran the “Percent to Double” routine in (see output in Figure 3.  The phrase “percent to double” tells us what percentage the underlying stock must rise in order for the call option to double in price.3Figure 3 – Percent to Double routine suggests buying Sep30 TZA call which will double in price if TZA rises 12.56% (i.e., if RUT declines by roughly -4.19%) (Courtesy

Figures 4 and 5 display the particulars and risk curves for buying 10 TZA Sep 30 calls.

4Figure 4 – TZA Sep30 details (Courtesy 5 – TZA Sep30 risk curves (Courtesy

A few things to note:

*The cost to buy 10 is $2,550.

*TZA is trading at $30.25/share.

*The breakeven price for this trade is $32.25 (if TZA is below $32.25 at expiration and we still hold this position then we will lose -$2,250)

*There are 50 days left until September expiration

*The trade has unlimited profit potential

Regarding potential, in Figure 6 we see that if TZA rallies back to its June low of $33.77 this trade will generate a profit of between $1,500 and $2,400 depending on how soon  that price is reached.6Figure 6 – A potential 1st profit target for TZA hedge (Courtesy


Is this a good trade?  I can’t say for sure that it is.  In fact, the only way this trade makes money is if the broader market suffers a hit, so a good part of me would prefer to see this trade “not work out”.

But the point of all of this is simply to point out that it is possible to hedge against a significant market decline by buying call options on an inverse leveraged ETF.

Mr. Market, you take it from here.

Jay Kaeppel

August/September – Play it Safe or Swing for the Fences?

We are entering an “interesting” time of year for investors (Unfortunately, that’s “Interesting” as in the ancient Chinese curse stating “May you live in interesting times”).

Now I personally I have no idea if the stock market is going to break out to the upside and rally to further new highs or if this latest lull will be followed by a painful reversal of fortune.  I am willing to play the long side as long as things are holding up/moving in the right direction.  But investors should be aware that the August/September timeframe is the “Danger Zone” for the stock market historically.

August/September Historically

Figure 1 speaks for itself.  The chart displays the growth of $1000 invested in the Dow Jones Industrials Average only during the months of August and September every year starting in1934.1Figure 1 – Growth of $1,000 invested in Dow Jones Industrials Average (using price data only) ONLY during August and September; 12/31/1933-present

Two key takeaways:

*The net result has been a loss of -53% or the past 82 year.  Not exactly the kind of returns most of us are looking for.


*Despite the negative net results, the fact is that the Aug/Sep period has showed a gain more often (45 times) than not (37 times).

So while caution appears to be in order, no one should assume that the next two months are doomed to show a loss.

Stocks versus Bonds

Figure 2 compares the performance of:

Ticker VFINX – Vanguard S&P 500 Index fund

*Ticker VFIIX – Vanguard Mortgage Bond Fund

(*VFIIX is used as a proxy for intermediate-term treasuries as it has a high correlation to IT treasuries and a longer data history.  Any short-to-intermediate term treasury fund or ETF would likely produce similar results)

The test starts in 1980 (when VFIIX started trading) and shows the total return for buying and holding each fund ONLY during the months of August and September each year since.

2Figure 2 – Growth of $1,000 invested in VFINX (stocks; blue line) versus VFIIX (bonds; red line); August 1980 to present


So what will it be this year?  A breakout to new highs?  Or something much worse?  I wish I could tell you the answer.  But at least now you have some information to help guide your “speculative” versus “conservative” instincts in the months ahead.

Jay Kaeppel

An Excellent Review of the Basics of the Double Bottom

Even experienced investors and traders can benefit from reviewing the basics once in awhile.  The link below leads to an article posted by Charles Schwab & Co.  that discusses the “double bottom” formation.

Finessing The Double Bottom from Charles Schwab & Co.

The double bottom is one of the most useful formations that a trader can learn about (in my opinion).  This formation:

A) Can be applied to any security (stocks/bonds/index/commodities/FOREX/ETFs/etc)

B) Tells you when a reversal of fortune may be imminent

C) Provides a built in stop loss level (i.e., below the recent low)

If you are into markets, trading, chart patterns, or just making money in general, I suggest you click the link and learn – or revisit – the basics of the double bottom.

Finessing The Double Bottom from Charles Schwab & Co.

Jay Kaeppel

The Evolution of a Silver Trade

Allow me to be candid.  If you have no interest in option trading there is a very high likelihood that you will not enjoy this article.  So while I will encourage you to “take a chance” and keep reading, if it “ain’t your cup of tea”, then “class dismissed”.  Thanks for stopping by and please check back soon.

If you are into option trading then settle in and get ready to learn a lesson in using the power of options to create a trade with unlimited potential and limited risk – and to then adjust that position to improve the odds of success and to lock in a profit, thereby reducing stress.

(See also Can Junk Bonds Overcome Unfavorable Seasonal Bias?)

Trade #1

The initial trade was found on 6/3 using the “SkewFinder” routine at and was based on a bullish outlook for silver.  The initial trade involved:

*Buying 11 Sep16 SLV 15 calls

*Selling 11 Jan17 SLV 20 calls

(click to enlarge)1Figure 1 – Initial SLV Sep15/Jan20 call spread (Courtesy

Adjustment #1

By 6/13 the initial trade had generated an open profit of $506 and shown in Figure 2.

(click to enlarge)2Figure 2 – A decent profit, but still risk of loss (Courtesy

At this point the decision was made to adjust the trade in order to eliminate the risk of loss, i.e., to lock in a profit.  That trade involved:

*Selling 11 Sep16 SLV 15 calls

*Buying 10 Jan17 SLV 20 calls

*Buying 2 Jan17 18 calls

The particulars and risk curves for this trade appear in Figure 3.  Note that the worst case now is a profit of $306.

(click to enlarge)3Figure 3 – SLV trade after 1st adjustment (Courtesy

Adjustment #2

After another upleg, SLV reversed to the downside on 7/12.  At this point the decision was made to make another adjustment.  This adjustment involved:

*Selling 2 Jan17 18 calls

*Buying 2 Jan17 20 calls

*Buying 1 Jan17 15 put

The net effect of this adjustment was to:

*Lock in additional profit

*Retain upside potential

*Create the potential for profit if SLV falls apart

See Figure 4 (click to enlarge)4Figure 4 – Adjusted trade as of 7/12 (Courtesy


When it comes to option trading the bottom line is that there are a lot of ways to play.  The more one learns and the more comfortable one becomes the greater the potential for entering into limited risk trades – and adjusting those trades to reduce risk, lock in profit and/or otherwise improves one’s reward-to-risk scenario.

Jay Kaeppel

Can Junk Bonds Overcome Unfavorable Seasonal Bias?

Personally I love junk bonds.  Yields greater than typical bonds and a high correlation to the stock market is not a bad combination – typically. In fact, this combination can generate some outstanding returns as long as the stock market does anything but crater.

But there is a time and a place for everything.

(See also The World is Your Oyster – 11 Days a Month)

Ticker HYB is the New America High Income closed-end fund.  Its portfolio can reasonably be described as “very junky”, which is why it presently sports a current yield of roughly 10%.  That is a very enticing yield indeed.  Figure 1 displays the monthly price chart since inception of trading in 1990.1Figure 1 – Ticker HYB (New America High Income); 1/2/90-7/8/16

HYB has certainly had its ups and downs, but it recently rose 30% from its January lows.  Interestingly, one would probably not guess from a glance at Figure 1 that this fund – and the junk bond sector in general – is highly cyclical in nature.

The Test

For the test we are using price data only and no dividends are included. Clearly dividend income plays a big part in the total return for this fund, but our goal here is simply to isolate the cyclical nature of junk bond price action.

Trading Rules:

*Buy HYB at the close of the 11th trading day of December

*Sell HYB at the close on the 5th trading day of June

Let’s examine the results.

The Results

Figure 2 displays the growth of $1,000 invested in HYB only between the 11th trading day of December and the 5th trading day of June from 1/2/1990 to 7/8/2016.2Figure 2 – Growth of $1,000 invested in ticker HYB ONLY during favorable seasonal period; 1/2/90-7/8/16

Figure 3 displays the growth of $1,000 invested in HYB only between the 5th trading day of June and the 11th day of December.3Figure 3 – Growth of $1,000 invested in ticker HYB ONLY during unfavorable seasonal period; 1/2/90-7/8/16

For the record:

*The “favorable” period showed HYB generating a net (price only) gain of +262%.

*The “unfavorable” period showed HYB generating a net (price only) loss of -92%.

Figure 4 displays the year-by-year results for HYB price action during the “favorable” and “unfavorable” periods.


Figure 4 – HYB price only performance Dec into June versus June into Dec.

It should be noted that during the June to December “unfavorable” period HYB has showed a price gain 9 times in the past 26 years.  So it should not be assumed that a price decline between now and December is assured.  Also consider that the last 5 “unfavorable” periods have seen a decline.  So we should not be surprised if an advance occurs this time around, particularly if the stock market does manage to break out to the upside and run.

Still, the line in Figure 3 and the numbers in the right hand column in Figure 4 should give us “junk bond lovers” pause.


Do the numbers above guarantee that high yield bonds (and funds) are headed lower between now and mid-December?  Not at all.  Can you make money in junk bonds in the months ahead?  Absolutely.  If the stock market moves to the upside junk bonds will likely follow.  Add in an already high yield and there is the “potential” for meaningful gains.

Just remember that history suggests otherwise, so don’t bet the ranch.

Jay Kaeppel

The World is Your Oyster – 11 Days a Month

Well I have not written much lately.  True confession: I belong to several “groups” and “associations” etc.  Recently one member fired off three emails in about an hour to the “host” of one group demanding to not receive any more emails from my blog (and only my blog).  The truth is I let it get under my skin a bit more than I should have and it threw me off.  But in the end the reality is that I realize the stuff I write about (and probably the way I write it) – as my Dad might have said – “ain’t everybody’s cup of tea.”  So no harm, no foul, Cest la vie, we all move on.

Recently I wrote an article about the somewhat weird goings on regarding trading days of the month using a basket of 17 iShares single country ETFs.  In the initial article I noted the fact that – inexplicably – all 17 ETFs showed a net gain on four specific trading days of the month since they started trading in 1996. This article builds on that original study.

Looking for a Few Good Days

A couple of initial points:

*I should mention that in doing the testing on the 17 initial single country ETFs, I used all of the data – no out of sample testing, walk forward, etc.  So if someone wants to shout “curve-fitting” I won’t really offer up a defense.  Still, the main point that comes out of all the number crunching is that the vast majority of these ETFs make their money on the same trading days of the month.  Which I found to be surprising – and quite compelling.

*I am not sure the finished product represents an actual usable trading “system”, because it ultimately requires 2 trades each and every month month in 17 ETFs.  Not sure how many people are up for that.  Still, I found the results so compelling that I decided to write about them anyway – people can use, not use, adapt the idea as they see fit.

*The data used was downloaded from and the “adjusted price” was used.

*No dividends, interest, taxes, fees or commissions are factored in.  This is purely a test of price movement.

The Test

Figure 1 displays the results of the following test:

*Buy and hold all 17 single country ETFs only on:

-The last four trading days of the month and the first two trading days of the next month

-Trading Days of the month #’s 9, 10, 11, 12, 13

-Each new trade starts with an equally weighted position in each of the ETFs.

-For testing purposes no interest is earned while out of ETFs.

*Versus simply buying and holding all 17 single country ETFs from 3/25/1996 through 7/6/2016.1Figure 1 – Cumulative % return for holding all 17 single country ETF only during the “favorable day of the month periods (blue) versus buying and holding (red); 4/1/96 through 7/6/16

For the record:

*Buying and holding all 17 iShares single country ETFs since inception in 1996 gained +86%.

*Holding all 17 iShares single country ETFs ONLY on the trading days of the month listed earlier (every month) plus annualized interest of 1% while out of stocks gained +1,585%.

To get a better sense of things, note that Figure 2 displays the “growth” of equity that would have been achieved if a trader held all 17 ETFs only during “all other” trading days (i.e., only during all days other than those listed above).  For the record, the net result is a loss of -87%.2Figure 2 – Cumulative % return for holding all 17 single country ETF only during the “non favorable day of the month periods”; 4/1/96 through 7/6/16

One Last Tidbit

The final piece that made all of this compelling to me is that all 17 single country ETFs vastly outperformed during the “favorable” days of the month versus the “non favorable” days as displayed in Figure 3.4Figure 3 – Net return, returns during favorable periods, returns during unfavorable periods for 17 single country ETFs; 4/1/96 through 7/6/16

Just to be clear, here is how to read the table in Figure 3:

*Between 4/1/96 and 7/6/16 ticker EWA (iShares Australia) showed a net gain of +317%.  However, holding EWA only on the trading days each month listed earlier would have generated a gain of +909%.  Holding EWA only on all other trading days of the month would have generated a loss of -59%.

Note also that ticker EWJ (iShares Japan) showed a net loss over this 20+ year period   (-6%).  However, holding EWJ only during the favorable trading days listed above each month would have generated a gain of +829% (all other days lost -90%).


Is there something to “seasonality”?  Well, at least when it comes to the various stock markets in countries around the globe, the short answer appears to be “maybe so.”

Jay Kaeppel


A Little Perspective Goes a Long, Long Way

Well it is difficult to argue that there are not a lot of things to be “concerned” about these days.  Likewise if you are looking for reasons to be angry there is no shortage of “things” to fit the bill.  Finally, in truth I do not consider myself to necessarily be an optimist. But everyone once in awhile I do try to step back and try to assess things from a broader perspective.  I found that the article linked below does a pretty good job of that.  

For the record, this article is not a “lecture” on how spoiled we all are – it is a fascinating recitation of how far we have come in a relatively short period of time.  At the very least it will provide you with some fascinating facts to impress your family and friends with this holiday weekend.  I strongly encourage you to give it a read.

American’s Forget How Good They Have It by A. Barton Hinkle

Have a wonderful 4th of July weekend.

Jay Kaeppel