Cash is King

Source: http://club.ino.com:80/trading/2009/10/cash-is-king/
Posted on Wednesday, October 28th, 2009 | In Commodities, Investing Lessons, Trading Lessons

Contributed by: Trading School (http://ino.com) -

Please welcome Paul Judd to the Trader’s Blog stage where he will present to you a very interesting trick…BONDS ARE GOOD! Paul should know as he’s dedicated the last 14 years to treasury bonds where he’s learned the in’s and out’s that we should all take a look at! So please read the article below, visit Paul’s Blog here, and let the comments fly!

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I can take a position in the bond market prior to the release of an economic report. Once the report is released, I can close out my position and take profits. Cash is King!

Not so if you are a long-term investor in stocks.

A popular slogan used by many “salespeople” on Wall Street is to buy and hold for the long term. However, not only is your money tied up for years but also holding for the long term doesn’t necessarily mean you will make a profit.

For instance, if you had invested in the stock market in 1962 and held until 1982, you would have lost money.

The following are comparisons as to why trading bonds can be better than buying stocks:

Advantages of Trading Treasury Bonds	Disadvantages of Being a Stock Investor
Trading the bond market gives you flexibility. In other words, we can either go long (buy) or short (sell), depending on what economic report will be released.	Most people who invest in the stock market go long (buy stocks).
It doesn’t matter to us if the economy is slowing down. We can go long bonds	A slowing economy affects corporate profits, which can cause stocks to go down.
Inflation is the enemy of the bond market. When this occurs, we can short bonds.	Inflation is also the enemy of the stock market, which is bad for stocks.
Disinflation is a good thing for the bond market.	CEOs get worried about disinflation. So do stock investors.
Deflation is the friend of the bond market. When this occurs, we can go long bonds.	Deflation is the enemy of the stock market. It affects corporate profits
When Alan Greenspan of the Federal Reserve raises interest rates, this can mean a bear market in bonds. In that case, we can buy put options.	Alan Greenspan watches the stock market, and many consider him the enemy of the stock market. Remember his famous speech in the late ‘90s, in which he uttered the words “irrational exuberance”? This caused the stock market to tumble.
A weak report from the Federal Reserve, such as the Beige Book report, can lead to a bond market rally	The Beige Book reports measures business conditions across the U.S. A weak report can mean a weak stock market.
Tight fiscal policy, such as tax increase, can lead to a rally in bonds.	Tax increases to the consumer or to businesses are another negative when people buy stocks.

The Secretary of State is always a friend to the Bond Market.	The Secretary of State can be the enemy of the stock market.
Government regulation can slow the economy. Bonds like that.	Government regulation can put the hand-cuffs on companies, which again can be bearish for stocks.
The strength of the U.S. dollar can be bullish for bonds.	The strength of the U.S. dollar can be bearish for multinational corporations.
Rising Oil Prices can mean a selling opportunity in bonds.	Rising oil prices can cause stock prices to slide.
Consumer sentiment in which Americans are reporting that they are worried about their jobs is positive for bonds – they like that.	Restructuring of a company can lead to layoffs and falling stock prices.
Event risks man a “flight to quality” in the bond market. An example would be the horrible situation that took place on September 11, 2001, in New York.	The September 11 attack caused a global economic slowdown, which, of course, was another negative for the stock market.
When new home sales or existing home sales are coming in strong, we can go short bonds.	Americans investing in a home instead of stocks can put a cap on stock prices.
An economic slowdown can mean a sideways-moving market in stocks and a bull market in bonds.	It’s hard to make money when buying stocks if the market is going sideways.

Yes, compared to the bond market, stocks can be more risky.

One last point to deep in mind: A stock investor may only invest in “blue chip” companies such as Enron, which was the seventh-largest company in the United States and had 600 accountants looking after the books. I find it interesting that every major mutual fund company had this “darling of Wall Street” in its portfolio. Yet most stock investors know by now that this $80-billion company came tumbling down.

People on Wall Street also say that you should diversify. I teach that having an “edge” over most people is to know one market, and yet, as a bond trader, I can still diversify by going either long or short bonds. Cash is King!

Treasury Bond Options Versus Stock Options

Even though we only trade the bond market, which can be traded either with futures contracts or with Treasury bond options, it’s a good idea to become familiar with both types of options.

For instance:
•    Bond and stock options consist of a seller and a buyer.
•    The terms are the same, such as premium, time value, out-of-the-money, at-the-money, in-the-money, intrinsic value and exercise price.
•    Both bond and stock options are “American-style” options, which means that the buyer can choose to exercise his right to the underlying futures contract or stock before option expiration.
•    Dividends are also paid on various stocks, which can distort a stock option’s premium. This can’t happen with Treasury bonds.
•    Volatility skewing is more prevalent with stock options than with bond options.
•    Stock options are currently traded on five US exchanges:

1.    American Stock Exchange (New York)
2.    Chicago Board Options Exchange
3.    New York Stock Exchange
4.    Pacific Stock Exchange (San Francisco)
5.    Philadelphia Stock Exchange

•    Stock options began trading in April 1973. The Chicago Board Options Exchange was the first to offer listed stock options.
•    Bond options are traded at the Chicago Board of Trade.
•    Bond options began trading October 1982.
•    Margin requirements when writing options are higher for stocks than bonds.
•    Which gives you more leverage? Bond Options!

Paul Judd
Please visit bondminicourse.com to learn more about me!