Funds Investing

Pricing

When buying or selling either an open-end or closed-end fund, an investor usually knows the current value of the fund’s assets per share (NAV).

For example, to buy an open-end fund with a NAV of $15, an investor pays $15 per share. The fund simply issues new shares to the investor at the current NAV. The assets the fund manages have increased, but the value per share remains the same because the new shares have exactly the same value as the other shares. If the investor sells, he or she is paid the NAV. The amount of assets the fund manages has been reduced, but the NAV of outstanding shares has not changed because the shares redeemed were equal in value to all others.

With closed-end funds, the shares are traded in the open market and are consequently subject to demand/supply imbalances. They may trade at a price greater than their NAV (termed a premium) or at a price below the NAV (termed a discount). Read the rest of this entry »

Since almost all closed-end funds tend to sell at a discount, it can appear obvious that there is no reason to purchase closed-end funds when they are selling at a premium. Sometimes a special feature, for example, a closed-end fund having a private placement in its portfolio which is about to go public as a hot issue, may justify purchase at a premium. Otherwise, it is difficult to make a case for paying a price higher than NAV.

Central to the advantages of closed-end funds is the discount; both as to dividends and as to pricing variances. Read the rest of this entry »

Two things must be kept in mind when establishing a long position in this kind of hedge. First, since Treasury bond futures contractsrepresent face value of $100,000 worth of Treasury bonds, the investor will want to go long approximately $100,000 worth of closed-end bondfunds. When it comes to trading closed-end bond funds, I do not recommend buying more than 2000 or 3000 shares of a single fund for a short-term trade. That is why we would go long several different closed-end funds, representing positions of from $31,000 to $34,000 and amounting to approximately $100,000. That $100,000 long position offset the short position of 1 September U.S. Treasury bond futures contract at 100.18, priced at a 7.943 yield.

On February 10, 1978, with the Dow Jones Bond Average down to 89.79, two significant changes had taken place since we established our theoretical long and short positions: (1) The long positions in the bond funds had become profitable, and (2) so had the short position in the Treasury bond futures contract. For example, JHS was selling at 17⁵/8, up from 16⁷A; DBF was up to 16⁵/8 from 16¹/2; and PAI had gone from 13⁵/8 to 13³4. The net asset values of all three funds had declined but the discounts, as predicted, narrowed more than the decline in net asset values, resulting in the profits. Read the rest of this entry »

A credit spread option is an option whose value/payoff depends on the change in credit spread for a reference obligation. It is critical in discussing credit spread options to define what the underlying is. The underlining can be either

1. a reference obligation, which is a credit-risky bond with a fixed credit spread, or
2. the level of the credit spread for a reference obligation

UNDERLYING IS A REFERENCE OBLIGATION WITH A FIXED CREDIT SPREAD

When the underlying is a reference obligation with a fixed credit spread, then a credit spread option is defined as follows:

Credit spread put option: An option that grants the option buyer the right, but not the obligation, to sell a reference obligation at a price that is determined by a strike credit spread over a referenced benchmark. Read the rest of this entry »

What if a stock has run out of steam and we’re anticipating a period of consolidation or lower volatility for a period of time? What if we have identified a range-bound stock and we want to take advantage of this price pattern behavior? We can achieve this by trading low-risk, high-reward options strategies! The two strategies we’ll discuss in this chapter are the Butterfly and the Condor, both of which produce profits provided the price remains within a certain price range, determined by the Exercise prices we select.

Butterflies

The Butterfly involves the following steps (you can use all calls or all puts with the Butterfly—you cannot mix the two):

Butterfly with Calls

Step 1 Buy 1 lower strike (ITM) call

Step 2 Sell 2 middle strike ATM calls

Step 3 Buy 1 higher strike (OTM) call

There are two key points here:

1. The ratio between buying the ITM call, selling the ATM calls, and buying the OTM call is 1:2:1.
2. The distance between the three adjacent strikes must be equal, with the middle strike being ATM or as close to ATM as possible.

Read the rest of this entry »

To help you manage the three secondary sins just mentioned as well as the seven major ones, I’ve put together a list of ten things you should and should not do. They compliment the sins, in that they are action items as opposed to “warnings.” Just as the ten commandments of biblical fame suggest ways to avoid the seven sins, these commandments function in a similar manner. Keeping a list of these commandments handy next to a list of the sins should provide you with the model you need to maintain your virtuous investment path.

Let’s look at each commandment and how to obey it:

1. Thou shall not convert thy neighbor’s investment
2. Thou shall not make a killing
3. Know thy investments better than thou know thyself
4. Thou shall not make unto thee a graven image of profits
5. Thou shall not take the name of the Lord in vain or issue nay foul-tempered oaths while investing
6. Thou shall not commit adultery chasing some thy little stock of the moment
7. Honor they mother, thy father, and the market in good times and bad
8. Thou shall not steal from thyself by forgetting about taxes
9. Thou shall not worship false idols or deceitful financial advisors

As you read through the descriptions of the sins and the accompanying monologues, it’s likely that you had an inkling of the ones to which you are most vulnerable. You may have found one or more than one, seeing your own investing behaviors in the descriptions. While it’s important to be aware of all seven sins—most of us fall victim to all of them during the course of an investing lifetime—pinpointing the sins that are most likely to hurt your investing performance is key. To help in doing this, I keep a journal of my trading activity. In the journal, I note where and when I first heard of a particular company, what research I did into it, the reasons behind my decision to buy it (or not buy it), why I sold it, and so on.

To help you pinpoint your vulnerabilities, I’m going to list some common investing mistakes and the specific sins that catalyze these mistakes. As you’ll see, more than one sin can cause some mistakes, so you won’t always find a one-on-one relationship between mistake and sin. Still, this exercise will help you hone in on your vulnerabilities, narrowing the list down from seven to one, two, or three. Read the rest of this entry »

Valuation

The value of a mutual fund depends on the prices or values of the underlying securities and other assets held by the fund. The manager must carry out regular valuations of the fund’s property, so that the prices at Which shares or units may be bought and sold can be calculated. Regulations usually prescribe how often Valuations must be performed. In the UK, for example, the required minimum frequency is twice each month The majority of funds are valued on a daily basis, but some managers prefer a weekly valuation, and some carry out more than one each day. Read the rest of this entry »