On S&P Short ETF Action and Chesapeake Corp. Options

Tuesday was not as action packed compared to Monday. However, we were still glued to the screen all day.

We noticed two very odd things happened on Tuesday. ProShares Short S&P500 (SH) was off by 1% throughout most of the day, as compared to the S&P 500. Was it the data feed? We have real time feeds, but we checked against the delayed quotes on various sites, which lined up more with the decline in the S&P 500. This issue has been noted before by us and others during volatile markets.

This is the unfortunate issue with ETFs. They are subject to the supply and demand of their market, which can really push the fund off its intrinsic value. Should anyone reading this blog have knowledge or experience on the issue or witnessed the same yesterday, please contact us to confirm!

Secondly, we continue to move in and out of Chesapeake (CSK) call options. We think other players are doing the same both in the equity and options. The stock has had some interesting intraday market action in the last few days. We still like the stock for the long term and hold a long equity position. If the stock moves back to the lower 12.00-12.20, we would consider selling the long dated puts with an eye toward averaging down or selling additional lower dates (time spread) in a stock or market down draft.

We like to select the strings according to the Delta, so typically we're deep in the money with a bit of time left on the calls. However, the short puts are used more for entry points, so investor judgement applies. As these are more sophisticated tactics than your normal buy/sell, the investor needs to do the homework and understand the substantial risk in terms of selling puts. We may or may not employ the above strategy, as it is very contingent on the portfolios and market at any one particular time. Our goal with sharing the above is to help educate others reading the site and to get them thinking of other strategies & tactics in their particular portfolios.

SH 1-yr. chart:

CSK 1-yr. chart:

Comments

[keith:]

26th trading (SH) went ex-div. It was .52. Thanks for keeping us updated R.S. Regards, Keith

2007 Jun 28 11:54 AM

[David Jackson:]

Keith, I thought that the short ETFs didn't require payment of dividends, since they use futures? Or are the futures adjusted for dividend payments?

2007 Jun 28 12:08 PM

[keith:]

The structure is 95% swaps. The div still flows thu the swap from the counter party. The div is invested in over nights. They chooses to pay put a "distribution" quaterly. Had to make a call on this one.

2007 Jun 28 02:11 PM

[keith:]

sorry about the spelling 2 minutes till Fed. thu = thru and put=out

2007 Jun 28 02:13 PM

[timpc7:]

the SnP futures dropeed Monday after the close which gave you the benefit of the share increase on the inverse at close. The cash markets didnt reflect the drop until Tuesday!

2007 Jun 28 12:22 PM

[keith:]

This one really caught me off gaurd. (SH) is made up differntly and it was the distribution that moved it down. See my blog for full story. Very interesting!

thecapitalinvestor.com...

2007 Jun 28 01:27 PM