Wednesday, February 01, 2006

Oil, Semi, Interest Rates and Other Money Making Things

Busy few days even though the market hasn't done a whole lot.

Looking at broad indices, we're exactly where we started a few days ago, but individual sectors are singing a different tune.

Semi. We've been long Semiconductors for a while via SOX credit spreads and some underlying stock. We're still long SOX but we did liquidate long stock positions (KLAC, TXN) at the greatest point of pain. I think we're wrong about the stock, but right about the sector. That's why we're option traders first and stock traders last. :) Today we added more to our SOX positions jsut as the sector was reversing. Regardless of our fund money, personally I think Semi's will do better going forward and I would be getting longer on every scary dip.

Oil. Whoever doesn't think it is at least interesting right here right now, is fast asleep. According to fibonacci ratios and a robust directional signal (read Mr. Dinapoli's book for info), a top is in place - confirmed by today's close. Specifically I am referring to OIH. Now, I don't read into indicators and signals too closely (our model does not rely but does consider them as a reference), but one thing I am very willing to bet on is that OIH is going to MOVE. Directionally, I would recommend a net short delta position with a defined exit strategy on both sides. But, since there is a strong upside possibility as well, Cadence Capital money is going into long gamma via oil stocks such as APC (entered today) and tomorrow AHC, VLO, etc.

Interest rates. They are higher. More importantly, risk-free rate is above 4% with 13 week T-Bill paying 4.362%. Now, a lot of vol arbitrage funds are reporting performance in low to mid single digits for 2005. Makes you think. When you consider their Sharpe ratios it makes you think twice.

I've been saying for a while now (before the blog got started) that vol arb is a tough game. In fact, in spite of all the talk about vol reversion to the mean and other "more predictable" things, at least empirically, it's become at least as tough of a way to make money as playing direction.

There must be a better way. There is. Stay tuned.

Cheers,
/Dmitry

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