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protrader
Contributor

Trade o' the week (or trade of a lifetime?)

Despite the bad reputation garnered during the credit crisis of September 2008, there is and will continue to be for the foreseeable future huge opportunities in purchasing credit default swaps (herein referred to as CDS products).  CDS products function essentially on capital markets as a way for banks and other lending institutions to limit their risk by transferring that risk to willing purchasers for a monthly stipend.  With that being said, a moody’s BBB rated CDS of $500,000 can be purchased securing a stipend of approximately $8,500 per month on a 12 month term at the time of this writing.  One must recognize the risks involved in such a trade, i.e. should the company default on the $500,000 loan, you are now responsible, however we feel that such a purchase on a BBB security is prudent.  Those wishing to limit their exposure can investigate similar options securing smaller amounts or investigate CDS products on A, AA, or AAA rated companies which will generate a lesser, but more secure income (at the time of this writing, a $500,000 AAA CDS would generate only about $600 per month in income).

 

Happy Leveraging.

 

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10 Replies
hardnox604008
Advisor

Re: Trade o' the week (or trade of a lifetime?)

Despite the undeserved bad reputation that "Our American Cousin" has gotten owing to Friday's unfortunate occurrence, Mrs. Lincoln returned  to Ford's on Tuesday to catch the rest of the show.

 

She reported termed it, "not too bad."

Jim Meade / Iowa City
Senior Advisor

Re: Trade o' the week (or trade of a lifetime?)

As the resident grouch, let me say that if your post is intended for farmer-producer marketers, most of us are interested in how to sell cattle or grain so your post isn't of much use.  If you are trying to sell something, then you are soliciting which is not permitted.

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protrader
Contributor

Re: Trade o' the week (or trade of a lifetime?)

no soliciting here.  just an interesting idea I came across when doing my own marketing.

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Jim Meade / Iowa City
Senior Advisor

Re: Trade o' the week (or trade of a lifetime?)

"an interesting idea I came across when doing my own marketing.".

 

Maybe I'm grumpy because I can't even sell corn let alone swaps and I'm just jealous of someone with more money and expertise than I have.

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protrader
Contributor

Re: Trade o' the week (or trade of a lifetime?)

I can't be certain, but I'd say if corn hits $10 I'd probably sell.

 

I did this at $6.3- and you may consider looking into it:  Sell a high (corn beans or wheat call) and buy a low strike call (same product) selling the high strike will offset the cost of buying the low strike...which strike prices are up to you- when corn was around $6.3- I did $5.90 and $8.00 for a net cost of $0.32/bushel which profits when corn is above.  For this particular example, the trade was profitable above $6.30 and leveled off at $8 in terms of profit.  I'm a big fan of this trade, but of course, take it for what its worth (its free info! 😉 )

 

of course you can do the same thing if you're bearish too, just different trades but I'm bullish going into july. (once again- free info! don't stake the farm on it)

 

I just found the CDS thing interesting because that pays for a Magnum 235 or 8235R in 16 mos.

 

heh...I just thought of an alternate use:  Construct a 1.1 million bushel bin and new grain system, lease it from an off shore holding company that you create, then let that offshore holding company go bankrupt, write an option to buy into the company for say...$200k and have the company's debts secured by a CDS that you pay 12k/month to secure. Completely dishonest and disgusting morally, but thats what bank of america and AIG did.  (maybe you'd get a bailout?)

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dapper7
Senior Contributor

Re: Trade o' the week (or trade of a lifetime?)

pro. you did not say what it would cost to gain this 8.5k stipend. if you did i missed it.

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protrader
Contributor

Re: Trade o' the week (or trade of a lifetime?)

no cost.  You are basically buying the risk on a 500k loan from the bank so they'll pay you that stipend.  Other amounts are available too, this is just the one I found.

 

Basically, how it works is if this corporation defaults on the loan, you become responsible for it so that stipend is payment for you assuming that risk. (thats where the moody's ratings come in- I think that if you could find a CDS on an AAA company I'd take it and run with it AAA means financially strong and extremely unlikely to default, not sure of any examples of such companies off the top of my head but they exist) (they also pay alot less)

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hardnox604008
Advisor

Re: Trade o' the week (or trade of a lifetime?)

It's basically just like selling a put.

 

You keep the premium but are on the hook for market defaults.

 

Like naked option selling, pretty much a pro's game.

 

If you think you have inside information or insight into why some piece of debt is overrated, you can buy (put up the money) with the hope of raking it in big.

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hardnox604008
Advisor

Re: Trade o' the week (or trade of a lifetime?)

http://www.zerohedge.com/article/next-big-short-restaurant-chains

 

If you want a sector to look at for shorts, I'd suggest that restaurant chains are a good place to look.

 

After the restaurants go through bankruptcy and break their leases, or go away, commercial real estate is next but I think that is the next lnk on the chain.

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