As far as I am currently aware, very active institutional trading of student debt isn't currently occurring, however I'm going to discuss some reasons why I think it almost certainly will happen over the next decade:
In order to understand this theory, we have to go back seven years to the 2008 financial crisis and the rise of Collateralised Debt Obligations (CDOs).
In effect, a CDO is a group of loans that are packaged together to make a tradable product that can be sold between banking institutions and hedge funds. CDOs have been used in financial markets since 1987, when junk bonds were grouped together by Drexel Burnham Lambert and were initially intended to make the trade of assets with predictable income streams easier (credit card debt, auto loans, etc).
CDOs remained a niche financial instrument until 2004, when the U.S. led housing boom caused a boom in the sale of CDOs, which in turn led to the creation of CDO derivatives (options and swaps) and eventually to the issuing of sub-prime CDOs in the run up to the 2008 crisis.
The use of CDOs to package student debt has been used for the past five years in the U.S., with companies like SLM Corporation leading the way with these products and this is presumably what Arrow Global are doing with the UK student they sold to them in 2013.
The use of CDOs in this fashion remains an excellent idea for the issuers, when we are in a low yield environment in combination with globally low interest rates. However, the nature of many student loans being index linked in some form, means that when either growth or interest rates begin to rise substantially (which regarding economic cycle dynamics means at some point they inevitably will), the default rate and or the rated value on these loans will also fall.
With U.S. student debt now totalling over one-trillion dollars in value, small increases in default rates begin to have much larger value in monetary terms than they otherwise would in smaller markets. This combined with the leverage that derivatives on these CDOs can carry in the over-the-counter markets means that the potential for volatility is likely to high in this debt market over the coming years.
Food for thought....
The Masked Stock Trader
Thursday 23 July 2015
Wednesday 22 July 2015
What Are Options?
Introduction:
Options are one of the three main derivative types (the other two being futures/forwards and swaps) traded on global exchanges. They are effectively contracts that represent the right to buy or sell an asset (stocks, bonds, foreign currencies, etc) at a certain price.
Technical Terms:
Before we go any further, you need to have a vague idea of what the jargon behind options actually means, so I have made a list of the key terms and their definitions below:
Premium: The amount in currency paid for the contract.
Strike Price: The financial value at which the underlying financial asset can be purchased or sold for.
Expiration Date: The date on which the option contract can be either used or becomes worthless.
Intrinsic Value: The payoff received if the option expired at the current price of the underlying asset.
Time Value: Added value given or taken away from the option due to the value of time (more time gives you more options).
In The Money: An option with a positive intrinsic value
At The Money: An option with a strike price close to the current underlying asset level.
Out of the Money: An option with no intrinsic value, but with time value.
American/European/Bermudan Options:
This has nothing to do with where the options are either listed or traded - a common mistake!
European options can only be exercised at the expiry date, while American options can be used any time before the expiry date.
Bermudan options are effectively in-between American and European options and can be exercised on specific dates/in specific periods.
Types of Option:
Put: This gives the holder of the option the right to sell an underlying asset at a certain price.
Call: This gives the holder of the option the right to buy an underlying asset at a certain price.
The easy way to remember what "put" and "call" mean is to think about it in the context of "putting something away" (getting rid of something) and "calling something towards you" (bringing something closer to you).
Binary/Digital: These are very similar to standard put and call options, but in this context you are either right or wrong on the move in the underlying asset (as standard, they never pay off more than $1).
These are best to use if you believe that the option will finish marginally in the money. If you believe that there's going to be a very large move in the underlying asset, then it is better to pick a standard call over a binary call, because the return you can gain grows linearly at prices above the strike price - you'll make more money.
Convertible Bonds: These work in a very similar manner to bonds, in that they can either pay a stream of coupons or be turned into underlying stock in an asset (prior to the expiration date).
Warrants: Warrants usually have longer lifespans than options and tend to act in the style of American options. They also involve the issuing of new stock at the agreed strike price (rather than the purchasing of existing stock).
LEAPS/FLEX: LEAPS (Long-Term Equity Anticipation Securities) are longer dated calls and puts traded on exchanges with standardised expiration dates in January each year. Time to maturity can last up to three years. These have three strike prices at 20% levels in and out of the money relative to the underlying asset.
FLEX (Flexible Exchange-Traded Options) were listed on the Chicago Options Board Exchange (CBOE) in 1993 and are basically LEAPS with a higher level of customisation in regards to the expiry date and the strike price.
OTC Options: These are simply options not traded on a major exchange (e.g. CBOE), sold between private bodies. These will often carry different rules regarding the payment of premium and are open to a very high level of customisation.
Why trade options?
There are a few reasons why people may decide to trade options, but generally the two main reasons are to either use them to hedge an existing portfolio or alternatively as an instrument of speculation.
To understand why someone may trade an option rather than the underlying asset comes down to something called "gearing". Generally, the term "gearing" is used synonymously with "leverage", which isn't wholly true in the case of options markets:
A Crude Gearing Example:
Let us pretend that The Masked Trader Inc. is trading at $100.
The cost of a $102 call option is $20
There are two ways of potentially profiting here:
1. Buy the underlying stock:
Let us say that the stock rises to $200.
In this case you would make a profit of $100 or 100%.
2. Buy the call option:
If I buy the call option for $20, then at expiry (assuming a European option) I can use this, paying $102 for an asset worth $200. I have paid $20 per option and get back $98. This is a profit of $78 per option, but in percentage terms this amounts to:
value of asset at expiry - strike - cost of call *100
cost of call
= 200-102-20 *100
20
=390%
That was a rather crude example, but you can see that in percentage terms it makes more sense to purchase the option than it does to purchase the underlying asset in regards to capital growth.
Options are one of the three main derivative types (the other two being futures/forwards and swaps) traded on global exchanges. They are effectively contracts that represent the right to buy or sell an asset (stocks, bonds, foreign currencies, etc) at a certain price.
Technical Terms:
Before we go any further, you need to have a vague idea of what the jargon behind options actually means, so I have made a list of the key terms and their definitions below:
Premium: The amount in currency paid for the contract.
Strike Price: The financial value at which the underlying financial asset can be purchased or sold for.
Expiration Date: The date on which the option contract can be either used or becomes worthless.
Intrinsic Value: The payoff received if the option expired at the current price of the underlying asset.
Time Value: Added value given or taken away from the option due to the value of time (more time gives you more options).
In The Money: An option with a positive intrinsic value
At The Money: An option with a strike price close to the current underlying asset level.
Out of the Money: An option with no intrinsic value, but with time value.
American/European/Bermudan Options:
This has nothing to do with where the options are either listed or traded - a common mistake!
European options can only be exercised at the expiry date, while American options can be used any time before the expiry date.
Bermudan options are effectively in-between American and European options and can be exercised on specific dates/in specific periods.
Types of Option:
Put: This gives the holder of the option the right to sell an underlying asset at a certain price.
Call: This gives the holder of the option the right to buy an underlying asset at a certain price.
The easy way to remember what "put" and "call" mean is to think about it in the context of "putting something away" (getting rid of something) and "calling something towards you" (bringing something closer to you).
Binary/Digital: These are very similar to standard put and call options, but in this context you are either right or wrong on the move in the underlying asset (as standard, they never pay off more than $1).
These are best to use if you believe that the option will finish marginally in the money. If you believe that there's going to be a very large move in the underlying asset, then it is better to pick a standard call over a binary call, because the return you can gain grows linearly at prices above the strike price - you'll make more money.
Convertible Bonds: These work in a very similar manner to bonds, in that they can either pay a stream of coupons or be turned into underlying stock in an asset (prior to the expiration date).
Warrants: Warrants usually have longer lifespans than options and tend to act in the style of American options. They also involve the issuing of new stock at the agreed strike price (rather than the purchasing of existing stock).
LEAPS/FLEX: LEAPS (Long-Term Equity Anticipation Securities) are longer dated calls and puts traded on exchanges with standardised expiration dates in January each year. Time to maturity can last up to three years. These have three strike prices at 20% levels in and out of the money relative to the underlying asset.
FLEX (Flexible Exchange-Traded Options) were listed on the Chicago Options Board Exchange (CBOE) in 1993 and are basically LEAPS with a higher level of customisation in regards to the expiry date and the strike price.
OTC Options: These are simply options not traded on a major exchange (e.g. CBOE), sold between private bodies. These will often carry different rules regarding the payment of premium and are open to a very high level of customisation.
Why trade options?
There are a few reasons why people may decide to trade options, but generally the two main reasons are to either use them to hedge an existing portfolio or alternatively as an instrument of speculation.
To understand why someone may trade an option rather than the underlying asset comes down to something called "gearing". Generally, the term "gearing" is used synonymously with "leverage", which isn't wholly true in the case of options markets:
A Crude Gearing Example:
Let us pretend that The Masked Trader Inc. is trading at $100.
The cost of a $102 call option is $20
There are two ways of potentially profiting here:
1. Buy the underlying stock:
Let us say that the stock rises to $200.
In this case you would make a profit of $100 or 100%.
2. Buy the call option:
If I buy the call option for $20, then at expiry (assuming a European option) I can use this, paying $102 for an asset worth $200. I have paid $20 per option and get back $98. This is a profit of $78 per option, but in percentage terms this amounts to:
value of asset at expiry - strike - cost of call *100
cost of call
= 200-102-20 *100
20
=390%
That was a rather crude example, but you can see that in percentage terms it makes more sense to purchase the option than it does to purchase the underlying asset in regards to capital growth.
Tuesday 21 July 2015
Fundamental Trade Notes: Short Silver
Morning,
Here are my notes for reasons why I am currently short silver:
1. China Growth Concern:
- Caused a drop across the commodity markets over the past month, of which a drop in silver has lagged behind the fall in the other major trading commodities.
- The drop and continued uncertainty in the Shanghai Composite Index is likely to continue to weigh down upon the Chinese economic outlook over the coming months.
2. Dollar Strength:
- Moves in the FOREX markets in combination with the poor Eurozone outlook and Asian quantitative easing program have created a dollar strong environment, which will help to pull all commodities downwards in price.
3. Gold Correlation:
- While silver does have more industrial uses than gold, it generally correlates with the gold price movement (as a fiat currency hedge - buying gold is going long market fear), which has been steeply downwards over the last couple of days. Silver needs to make a significant move downwards in order for this correlation to remain consistent.
Enjoy,
The Masked Stock Trader
Friday 17 July 2015
Gulf Keystone Petroleum: New Payment Analysis
DISCLAIMER: I don't have a licence to give financial advice,etc, therefore none of the below is to be viewed as such advice.
Morning,
As we found out last night, the Kurdish government is expected to begin the repayments to oil producers in the near term:
@ashm_ya: #Kurdistan govt. is expected to spend $150mln per month on repayments to oil producers in the #KRG & spend up to $700mln on govt.expenses
If we assume that this intention is correct and that this does indeed happen over the coming months, then the significance of these payments across all of the companies operating in the region will vary due to many factors.
For shareholders and traders, we must look towards the market capitalisation of these companies in relation to the potential payments they may receive:
e.g.
£5 million as a percentage of Gulf Keystone's current market capitalisation is 1.47%, whereas the same figure as a percentage of Genel Energy's market capitalisation is a mere 0.38%.
In simplified terms, a payment to a smaller capitalised company is more significant than that of the same payment to a larger capitalised company, which in turn makes Gulf Keystone Petroleum (for me at least) a continued buy at these levels and above across the short and medium term.
Enjoy,
The Masked Stock Trader
Morning,
As we found out last night, the Kurdish government is expected to begin the repayments to oil producers in the near term:
@ashm_ya: #Kurdistan govt. is expected to spend $150mln per month on repayments to oil producers in the #KRG & spend up to $700mln on govt.expenses
If we assume that this intention is correct and that this does indeed happen over the coming months, then the significance of these payments across all of the companies operating in the region will vary due to many factors.
For shareholders and traders, we must look towards the market capitalisation of these companies in relation to the potential payments they may receive:
e.g.
£5 million as a percentage of Gulf Keystone's current market capitalisation is 1.47%, whereas the same figure as a percentage of Genel Energy's market capitalisation is a mere 0.38%.
In simplified terms, a payment to a smaller capitalised company is more significant than that of the same payment to a larger capitalised company, which in turn makes Gulf Keystone Petroleum (for me at least) a continued buy at these levels and above across the short and medium term.
Enjoy,
The Masked Stock Trader
Tuesday 7 July 2015
Gulf Keystone Petroleum - Positive Fundamental Changes
DISCLAIMER: This should not be seen as financial advice to buy or sell stock!
Morning,
I'm a technical fan of Gulf Keystone Petroleum (GKP), but I'm going to put that to one side for the moment and briefly discuss the positive changes that have occurred recently that have made me decide to add to my long position here:
1. Independent Oil Sales:
- To quote the 29/06/2015 RNS: "Currently, sales of Shaikan oil comprise crude oil export deliveries by truck to the Turkish coast and sales to a domestic buyer under a new six months contract which provides for off-take of between 12,000 and 40,000 bopd."
- This suggests to me that we're finally in a place where the cash position can be allowed to either grow slightly and or remain in a neutral position.
- In addition to this, the chances of a placing being required to satisfy the bond holders of the company in accordance with the general overheads is now significantly reduced.
- If this 12,000-40,000 is sold at the rumoured market rate of $29/barrel (see LSE.co.uk), then this gives a daily revenue stream of between $348,000 and $1,160,000, which should certainly provide some stability to the company in the short term.
- Added to this, the rumour on the market (see LSE.co.uk) is that the current production rates are been split between this independent and the Kurdistan government at a 50/50 ratio, giving a daily revenue figure of £580,000.
2. Kurdistan Bond Raising:
- This is a possible fundamental change in the region that will allow for the possible repayment of debt to GKP by the Kurdistan government along with the future payment of oil produced - this begins to reassert the company's potential dominance in regards to both its production expansion and its asset size.
3. Kurdistan Vs ISIS:
- Kurdistan have proven themselves to be a very good weapon against ISIS in conjunction with US Army technical drone support, which places GKP in a much more geopolitically safer place toil companies in the region.
4. Recent Institutional Activity:
- According to Morning Star, the following funds have recently added positions in the company:
iShares MSCI EAFE Small-Cap
iShares Core MSCI EAFE
SPDR® S&P International Small Cap ETF
iShares Core MSCI Europe
iShares MSCI Europe Small-Cap
iShares MSCI United Kingdom Small-Cap
iShares MSCI Global Energy Producers
http://investors.morningstar.com/ownership/shareholders-major.html?t=GKP
5. Asset Sale Probability:
- All of these factors (especially the increased chances of an increase in payment consistency) add to the potential value of the company to potential bidders and a cashflow positive environment for the company would make GKP a significantly more viable bid for larger companies.
- We must also remember that they are sat on what can only be described as a "world class" asset, which under the current low share price makes GKP a screaming target for M&A in the Kurdistan region.
- On a balance of probabilities the chance of a significant increase in the share price seems more likely over the coming months and years than a major fall, but as ever, do your own research.
Enjoy,
The Masked Stock Trader
Morning,
I'm a technical fan of Gulf Keystone Petroleum (GKP), but I'm going to put that to one side for the moment and briefly discuss the positive changes that have occurred recently that have made me decide to add to my long position here:
1. Independent Oil Sales:
- To quote the 29/06/2015 RNS: "Currently, sales of Shaikan oil comprise crude oil export deliveries by truck to the Turkish coast and sales to a domestic buyer under a new six months contract which provides for off-take of between 12,000 and 40,000 bopd."
- This suggests to me that we're finally in a place where the cash position can be allowed to either grow slightly and or remain in a neutral position.
- In addition to this, the chances of a placing being required to satisfy the bond holders of the company in accordance with the general overheads is now significantly reduced.
- If this 12,000-40,000 is sold at the rumoured market rate of $29/barrel (see LSE.co.uk), then this gives a daily revenue stream of between $348,000 and $1,160,000, which should certainly provide some stability to the company in the short term.
- Added to this, the rumour on the market (see LSE.co.uk) is that the current production rates are been split between this independent and the Kurdistan government at a 50/50 ratio, giving a daily revenue figure of £580,000.
2. Kurdistan Bond Raising:
- This is a possible fundamental change in the region that will allow for the possible repayment of debt to GKP by the Kurdistan government along with the future payment of oil produced - this begins to reassert the company's potential dominance in regards to both its production expansion and its asset size.
3. Kurdistan Vs ISIS:
- Kurdistan have proven themselves to be a very good weapon against ISIS in conjunction with US Army technical drone support, which places GKP in a much more geopolitically safer place toil companies in the region.
4. Recent Institutional Activity:
- According to Morning Star, the following funds have recently added positions in the company:
iShares MSCI EAFE Small-Cap
iShares Core MSCI EAFE
SPDR® S&P International Small Cap ETF
iShares Core MSCI Europe
iShares MSCI Europe Small-Cap
iShares MSCI United Kingdom Small-Cap
iShares MSCI Global Energy Producers
http://investors.morningstar.com/ownership/shareholders-major.html?t=GKP
5. Asset Sale Probability:
- All of these factors (especially the increased chances of an increase in payment consistency) add to the potential value of the company to potential bidders and a cashflow positive environment for the company would make GKP a significantly more viable bid for larger companies.
- We must also remember that they are sat on what can only be described as a "world class" asset, which under the current low share price makes GKP a screaming target for M&A in the Kurdistan region.
- On a balance of probabilities the chance of a significant increase in the share price seems more likely over the coming months and years than a major fall, but as ever, do your own research.
Enjoy,
The Masked Stock Trader
Saturday 4 July 2015
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