What is a "risk reversal" and how to use it

Instructors corner.doc

In commodities trading, it is a hedge strategy that consists of selling a call and buying a put option. This strategy protects against unfavorable, downward price movements but limits the profits that can be made from favorable upward price movements. In foreign-exchange trading, risk reversal is the difference in volatility (delta) between similar call and put options, which conveys market information used to make trading decisions.

1. For example, say Producer ABC purchased an $11 June put option and sold a $13.50 June call option at even money (put and call premiums are equal). Under this scenario, the producer is protected against any price moves in June below $11 but the benefit of upward price movements reaches the maximum limit at $13.50.

2. Risk reversal refers to the manner in which similar out-of-the-money call and put options, usually FX options, are quoted by dealers. Instead of quoting these options' prices, dealers quote their volatility. The greater the demand for an options contract, the greater its volatility and its price. A positive risk reversal means the volatility of calls is greater than the volatility of similar puts, which implies that more market participants are betting on a rise in the currency than on a drop, and vice versa if the risk reversal is negative. Thus, risk reversals can be used to gauge positions in the FX market and can convey information to make trading decisions.

Cotton Belt Hit By Drought

Texas Drought Hits Cotton - WSJ.com

FORT WORTH, Texas—U.S. farmers are expected to plant 13.6 million acres of cotton this spring, down 7.5% from last year amid lower prices for the fiber, while poor weather threatens production, an industry group said. The smaller planted area could help raise cotton prices, as traders bet on a decline in supplies from the world's top cotton exporter.

Ethanol industry pinched in supply-dmand crunch

Supply-demand crunch pinching ethanol industry - CBS News

(AP) SIOUX FALLS, S.D. — Falling fuel demand, an ethanol oversupply and high corn costs could lead some Midwest biorefineries to cut back or idle production until profit margins improve, industry analysts say. Troy Gavin, general manager of the Midwest Renewable Energy ethanol plant near Sutherland, Neb., said the 28-million-gallon-per-year plant is halting production for a period of up to eight to 12 weeks because of the supply-demand imbalance. "It's got to work itself out of the system, and it will," Gavin said Monday. Ethanol futures on the Chicago Board of Trade have dropped nearly 50 cents over the past five months to $2.21 a gallon, and corn, the alternative fuel's primary feedstock, is hovering around $6.36 a bushe

Why Do Bond Refuse To Fall?

Why Bond Yields Refuse To Rise In This Recovery - Forbes

Markets have a vexing habit of teaching investors humility. Two years ago, I entered what I thought was the surest trade in the world by buying TBT (ProShares UltraShort 20+ Lehman) which traded for $50 at the time. TBT allows investors to bet on rising long-term U.S. Treasury rates.

USA's #1 export: refined fuels - $88B worth

The crude business of crude oil - Commodities - Futures Magazine

Last week March crude oil opened at $97.74 and closed the week at $98.67, staying within its current range of $102-$96. With the Greek passing of their austerity package and more rumbling from Iran, today we see March crude oil trading over $100. Also do you know the USA’s #1 export for 2011? If you said refined fuels you are correct. Yes, America sold globally more unleaded gas, diesel and jet fuel than any other item — approximately $88 billion worth. On the technicals, on the daily chart below we see ADX at 17 reflecting a weak trending market, confirming a range. MACD is just crossing up over the signal line with no divergence. Looking at last week, we see Stochastics corrected from oversold territory, are now midrange and rising. Look at how open interest has risen. Who or what is causing this?

Euro has room to run

CNBC Currency Blog — Holland: The Euro Still Has Room to Rise: Strategist — CNBC.com Global Currencies News - CNBC

The euro shrugged news of a Greek debt deal, but this strategist thinks the fun isn't over. Greece reached agreement on austerity measures, bringing it that much closer to a bailout lifeline. Hooray! But unfortunately, the euro [EUR=X 1.3186 -0.0005 (-0.04%) ] shrugged off the news.

That just means there is more room for it to run, says Todd Gordon, co-head of research and trading at Aspen Trading Group. "It was a significant development this morning with Greece agreeing to austerity measures," he told CNBC's Scott Wapner. "I think the contagion trade is coming off. I think it's a euro positive situation."

Turkish investors see and feel something big coming up

UPDATE 1-Turkish bond yields dip, shares jump on easier liquidity - CNBC

ISTANBUL, Feb 13 (Reuters) - Easier liquidity conditions allowed Turkish banks to bid strongly and drive yields lower at two debt auctions on Monday, while banking shares led a jump of more than 2 percent in the Istanbul stock index. Turkey's two-year benchmark bond yield maturing on Dec. 4, 2013 closed at 9.22 percent from, down from a previous close of 9.46 percent. Benchmark yields declined as far as 9.15 percent after two debt auctions attracted strong demand from investors.

Trade the Greek drama using the Swissie to get the risk out of the picture

CNBC Currency Blog — Holland: How to Trade the Turmoil in Greece — CNBC.com Global Currencies News - CNBC

Before you reach for the smelling salts, Kelly told CNBC's Melissa Lee that he has a way to play the uncertainty: get risk out of the equation by trading the dollar against the Swiss franc.[USDCHF=X Unavailable

Pssst. Hey bud, wanna buy the empire state building?

Bottom Line - Empire State Building files for $1 billion IPO

It's an old joke, at least among New Yorkers, but it will soon have a bit of the ring of truth to it. Empire State Realty Trust Inc., the company that owns the iconic 102-story building on 34th Street and Fifth Avenue in midtown Manhattan, has filed to sell investors $1 billion worth of its Class A shares, the company said Monday in a Securities and Exchange Commission filing. Reuters reported that the tower, once the tallest in the world, has seen several owners over the decades and had been at the centre of a legal battle among the Malkin family, property tycoon Donald Trump and real estate heiress Leona Helmsley.

Currency Markets Expect Great Things

CNBC Money in Motion Blog — Andrew Busch: Currency Markets and the Overall Market Direction - CNBC

With the Greece parliament passing the new austerity measures, the foreign exchange markets are buying risk with AUD,NZD and ZAR the top performers. The US dollar is down against 15 of the 17 major currencies [.DXY 79.00 -0.11 (-0.14%) ]. The EUR [EUR=X 1.3193 0.0002 (+0.02%) ] rallied from 1.3180 to 1.3280 on the Greek news and the comments from Chinese Premier Wen Jiabao saying that they would “fine tune” their economy starting this quarter.

Cocoa bean prices fall: Today's softs highlights.

Top Stories Of The Day

Central Cameroon Cocoa Prices Slide As Supplies Rise-Farmers, Traders YAOUNDE, Cameroon -(Dow Jones)- Cocoa bean prices fell in Cameroon's second main cocoa-producing Center Region this week as more supplies hit the market, traders and farmers said at the weekend.

Crude Futures Shut Down

Crude Futures Resume Electronic Trading | Fox Business

A technical glitch temporarily shut down trading Monday on the CME Group’s Globex electronic market for crude oil futures and options contracts. The error occurred shortly after 2 p.m. EST and the electronic platform reopened at 3:15 p.m. EST. “Due to technical issues, the CME Globex Crude Complex markets have been halted,” the CME said on its website moments after the shutdown. A short time later, the CME released a statement, saying, “Our IT teams are working to resolve the problem as soon as possible.”

Warm weather ahead for natural gas

US GAS: Futures Slip As Focus Shifts To Warm Weather Forecast - WSJ.com

NEW YORK (Dow Jones)--Natural-gas futures ended slightly lower Monday after weather forecasters issued milder temperature projections that suggested heating demand could ease next week. Natural gas for March delivery settled at $2.431 a million British thermal units on the New York Mercantile Exchange, down 4.6 cents, or 1.9%, from Friday's session. Traders remained cautious--Friday's session ended with prices unchanged--with the benchmark contract on Monday restricted to an eight-cent range. Research firm Ritterbusch & Associates noted funds seemed "unwilling to press the short side market assertively" as warmer weather forecasts drove the day's modest selling.

Smart Men Have Been Humbled By Gold Before

Gold Has Humbled Smart Men Before - The Source - WSJ

t takes a brave man to suggest that Warren Buffett has missed a point. After all, unless you are Carlos Slim or Bill Gates, a comparison of his bank balance and yours will show that he caught quite a few that you and I only saw when it was far too late.

Corn stocks to double next year according to USDA

USDA sees corn stocks double next year - baltimoresun.com

(Reuters) - A U.S. government report on Monday showed farmers in the United States will plant the largest area with corn this spring since World War Two, which could double the razor-thin stocks of this year and help defray costs to consumers and food companies.

Natural gas production cuts continue

Drillers cut natural gas production as prices drop - Boston.com

As natural gas prices continue to drop, the recent nationwide boom in drilling is slowing. Drillers don’t make money if prices go too low — and drilling wells isn’t cheap. “It is safe to say that there will be fewer natural gas wells drilled in 2012,’’ said Kathryn Klaber, president of the Marcellus Shale Coalition, an industry group based in Pennsylvania. In recent weeks, several companies have announced plans to cut gas production around the nation, but experts say the low prices are also opening up new markets.

Gold edges down

Gold edges down on lingering euro-zone worries - Metals Stocks - MarketWatch

Greece’s parliament approved further austerity measures aimed at paving the way for more money for the debt-strapped country and averting a disorderly default. But that was tempered by doubts about their implementation and further steps in approving the aid. Gold for April delivery GC2J +0.02% declined 40 cents, less than 0.1%, to settle at $1,724.90 an ounce on the Comex division of the New York Mercantile Exchange. That was gold’s second straight session in the red.

Obama Futures Correlated To S&P's Best Start In 21 Years

Obama Futures Rallying in Correlation With S&P 500 Best Start in 21 Years - Bloomberg

The Standard & Poor’s 500 Index’s biggest rally to start a year since 1991 is coinciding with a 15 percent increase in President Barack Obama’s re-election odds, showing growing investor confidence in the U.S. economy. The benchmark gauge for American shares has climbed as much as 7.5 percent in 2012, the most in 21 years, as unemployment fell and Federal Reserve Chairman Ben S. Bernanke vowed to keep interest rates near zero through 2014, according to data compiled by Bloomberg. The cost of a bet paying $10 should Obama win another term rose to $6 on Feb. 10 from $5.20 on Jan. 1 and below even money in November at Dublin-based bookmaker Intrade.

Stricter financial reforms in Greece raising stocks in New York.

Banks lead Wall St higher after Greek deal

(Reuters) - Stocks rose Monday, led by banks after Greece's parliament approved strict financial reforms needed to obtain an international bailout package.The deal helps Greece avoid a potentially chaotic default, though the government remains under pressure to convince a skeptical euro zone that it will abide by the terms of the package.Though Greece's economy is small in the context of the euro zone, investors feared an unruly default could have eroded domestic bank profits and put weaker members of the region at risk, creating a threat to global economic growth.

Banks lead Wall St higher after Greek deal

(Reuters) - Stocks rose Monday, led by banks after Greece's parliament approved strict financial reforms needed to obtain an international bailout package.The deal helps Greece avoid a potentially chaotic default, though the government remains under pressure to convince a skeptical euro zone that it will abide by the terms of the package.Though Greece's economy is small in the context of the euro zone, investors feared an unruly default could have eroded domestic bank profits and put weaker members of the region at risk, creating a threat to global economic growth.

ECB Resumes Buying Bonds At Low Level

ECB Keeps Bond Buys at Low Levels - WSJ.com

FRANKFURT—The European Central Bank kept its closely watched bond purchases at a low level last week, a likely signal in the wake of the recent rally of euro-zone periphery government bonds that the bond purchases are a temporary measure. The ECB settled last week a total of €59 million in government bonds bought on the secondary market, down from €124 million the previous week. Recent ECB bond purchases have been considerably below the double-digit billion levels seen in August and September when the ECB resumed bond purchases due to market stress after spending 19 weeks on the sidelines.

CFTC asks for 49% budget increase

CFTC Gensler asks for 49% increase in budget - Regulations - Futures Magazine

Dear Senators Inouye and Cochran and Representatives Rogers and Dicks:
 
I am pleased to transmit the Commodity Futures Trading Commission (CFTC) Budget and Performance Estimate for FY 2013. The CFTC’s budget request strikes a balance between important investments in technology and human capital, both of which are essential to carrying out the agency’s mandate under the Commodity Exchange Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Congress has mandated that the CFTC oversee both the approximately $37 trillion U.S. futures markets, as well as the $300 trillion U.S. swaps market. It is essential that the derivatives markets – both the futures and swaps markets – work for the benefit of the American public; that they are transparent, open and competitive; and that they do not allow risk to be spread through the economy.

It's a good day to be an asset manager.

Are asset managers feeling optimistic?

Figures from data provider Camradata shows that asset managers cut their active risk management in the fourth quarter last year to move closer to the class benchmarks. This hints at a growing belief that the market will normalise a little more. Martyn Dorey, director at Camradata, told Financial News: “Ten of the 12 asset classes in the report have seen active risk go down. This could be that there is increased optimism. When there is a lot of volatility in the marketplace, managers tend to move away from the benchmark and into defensive sectors. This could be interpreted as fund managers getting more optimistic for economic recovery.”

Copper Thieves Hit Meals On Wheels - Have You No Shame?

Copper Thieves Hit Meals on Wheels -- Again

FORT WORTH, Texas - Hundreds of people had to go without a hot meal today thanks to copper thieves who knocked out power to Meals on Wheels of Tarrant County. About 1:30 a.m., someone climbed on the roof of the organization's building at 320 South Freeway in Fort Worth and cut a live wire in order to steal about 80 pounds of copper.

Greek debt crisis causing global market problems.

Greek debt crisis ripples through markets

You drop a stone in a still pool of water, the ripple will carry far beyond the actual drop area. That is what is occurring with the Greek debt crisis. The ripple effect is reverberating not only in Europe but globally. For the United States, where part of the blame for the global debt concerns emanated with the repeal of Glass/Steagle where banks were allowed to compete with brokerage firms and where the consolidation of good and bad mortgages were securitized and sold globally. There is no question that the bad paper, which was impossible to evaluate for purposes of financial statements and where even the good, serviced mortgages started to default continues to cause havoc in financial circles.

Spain's bonds will outperform Italy's

Spain’s Bumper January Bond Sales Widen Funding Gap to Italy: Euro Credit - Bloomberg

Spain’s bonds are poised to outperform Italy’s for a second year after the nation’s debt agency in Madrid raised more than a quarter of the funds it needs this year in the past six weeks. Spain has issued 25.4 billion euros ($34 billion) of debt so far this year, according to UBS AG estimates. Italy has sold 8 percent of its requirement while France has issued 16 percent and Germany 12 percent, the calculations show. All four nations will sell securities this week amid concern that a plan to help Greece avoid default is unraveling and may spark a fresh wave of contagion in the euro-region.

Will The Trade Deficit Start A Currency War - This Again?

Will the U.S. Trade Deficit Spark a Currency War?

If rising exports are going to lead the economy into a new era of prosperity as President Obama hopes, there isn’t much to cheer about. Last year’s trade numbers, which the Commerce Department released Friday, show exports are rising briskly, but the overall U.S. merchandise trade deficit soared to a record $558 billion. That’s up 11.6 percent from 2010 as imports continued to rise even faster than exports. The country-by-country breakdown confirmed what every shopper who reads product labels knows. China is responsible for more than half the total deficit, with its exports of $399 billion to the U.S. last year dwarfing the $104 billion in goods that the U.S. sent China’s way. Imports from China jumped $34 billion last year; exports to China rose only $12 billion.

Higher-Yielding Currencies Outpace on Greek Vote Buying

Higher-Yielding Currencies Rise as Greek Vote Boosts Demand - Businessweek

Feb. 13 (Bloomberg) -- Higher-yielding currencies rose against the dollar and yen as optimism increased that the outlook for Europe’s debt crisis is improving, boosting investor demand for risk. The euro pared gains after approaching a two-month high against the dollar. Greek Prime Minister Lucas Papademos won approval from parliament yesterday for austerity measures needed to receive a second aid package, which euro-area finance ministers must decide whether to release when they meet Feb. 15. The dollar fell against most of its major counterparts, including the New Zealand dollar, as stocks and commodities rose before reports forecast to show strong U.S. growth.

Bund futures fall as Greece approves austerity measures

EURO GOVT-Bund futures fall after Greece approves reforms | Reuters

Market sentiment has been yo-yoing in recent weeks as Greek political parties struggled to agree on the painful reforms demanded by the IMF and the EU in exchange for a second 130 billion euro bailout. Feb 13 (Reuters) - German Bund futures fell at the open on Monday after the Greek parliament approved austerity measures that took the country closer to securing a new bailout, decreasing risks for now of a disorderly default.