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There follows a discussion of one class of derivatives, called "autocallables." At base, banks are the counterparties in the autocallable trade, so they have an incentive to hope for market stability which, in part, is caused by their own need to busy "insurance" against their exposure to these options. Sindreu summarizes:If you bought so-called structured products recently, you have plenty of company. But is precisely their popularity that could make them - and perhaps the entire stock market - riskier than they seem ... The bargain often appeals to less-sophisticated investors who otherwise might not dabble in complex derivatives. For banks they bring in fat fees.
His conclusion: you shouldn't trust the Vix as a gauge of potential trouble. Quoting Jeffrey Yu of BNY Mellon, "Low volatility begets low volatility. Until something goes wrong."So autocallables look attractive because the stock market is calm, but the market is calm because people are buying so many autocallables. The feedback loop is reminiscent of the one created by funds that directly wagered against volatility back in 2017 and 2018. When a bout of selling broke the cycle, banks stopped hedging, volatility exploded and the market tanked.
© 2015 Mutual Fund Observer. All rights reserved.
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Comments
I do recall a recent conversation with Kevin Simpson of DIVO fame, indicating that high volatility enhances the distribution potential of running a covered call ETF...FWIW.
I would be interested in your opinion of DIVO.
But now,
"Crack that whip."
DIVO is a call-writing funds. It's lags the industry giant JEPI and is more expensive too. In the up markets like this, it may be covering its calls, or its stocks are being called away. But that is the deal - you give up some upside for options income. Here are the charts for JEPI, DIVO, IVV/SP500.
https://stockcharts.com/h-perf/ui?s=JEPI&compare=DIVO,IVV&id=p47538115979
For me, JEPI does not have enough of a track record. And I am not sold on the idea of writing calls against entire indexes.
If I set MFO premium to a five-year window, DIVO's APR out performs all of the other ETF's in the Options Arbitrage category, and with respectable Martin and Sortino scores. Over its seven year history it outperforms its competitors, and has the best Martin and Sortino scores. If one only looks back a year, then DIVO and JEPI are getting smoked by the majority of etf's in the category.
For my purposes, DIVO was competing with AMFFX rather than JEPI. DIVO is cheaper than AMFFX. DIVO versus AMFFX.
Yet another dinky linky.
I was not familiar with AMFFX and so looked it up. Still can not figure out why you compared it with DIVO. Please say more / share more.
P.S.: For me, derivative income equity funds are a different animal than historical traditional equity income funds. But there may be similarities between them that may be compelling for others and i would like to understand.
Here is what the prospectus has to say about that part of their strategy: That doesn't sound crazy to me. I can't speak to why Lipper considers it an equity-income fund.
For those that are color challenged (blind) -
https://www.morningstar.com/columns/rekenthaler-report/boomer-candy-sweet-treats-or-investment-toothache
I have not read JR's previous articles on the topic.
I agree with striving for simplicity. DIVO is simple enough for you and I - I think we talked about it before.
I have heard negative media comments about writing covered calls on bonds (or fixed income ETFs). In the fixed income realm, IMHO, that is probably simple when one considers the level of complexity that exists in the bond land. Perhaps, @Devo can chime in.
I get that "simple" has an individual definition. I think if an investment can not be owned at least up to 5% of PV, it is probably not simple for that person.
Disclosure: The only boomer candy I own are the Hedge Equity strategies.
As LTC Hal Moore said at the Battle of Ia Drang Valley, "Nothing's wrong ... except there's nothing's wrong."
I agree the markets are treading water and churning - there is a false sense of security forming, but at least it's not overwhelmed with bullish exuberance. Maybe that's b/c of the geopolitical and electoral climate around the world this year?
Bad news is good news. until...bad news is bad news?
That said, take out the Mag-7 and that chart will look a lot different, I bet.
Value has been lagging for about 15 years now.
But one day....
I got one word fer yooz--- in line with @rforno's remark: BREADTH.
A healthier Market would show more breadth of profit, in addition to the crazy-nutso, irrational shot upward in the MAG-7.
But you most often seem to want to talk past what others have to say; so, carry on.
Big Tech was flat for a decade after the Dot.com boom but that ignore the 45% or more drop initially. Small caps EM etc did much better
Earnings estimates for SP500 are dropping explaining the lack of breath.
diversification doesn't help until it is critical
I know we are at a market top when my 17-year-old son is begging me to allow him to trade these options with his savings from birthdays and graduation (‘Traders Are Flocking to Risky Zero-Dated Options. You Can Go Completely Broke.’ ) ”
- Letters to the Editor - Barron’s July 8, 2024
But let me sell you NOW Value, SC, EM and CEFs.
Wait, last Dec the "experts" told us that the Fed is going to cut 5-6-7 times, buy Treasuries. VGIT is finally at 0.2% YTD.
It's amazing how these "experts" get paid and have a job.
Sure, one day it will happen.