A Risk-Free Trade on the World's Riskiest Stocks
By Dr. Steve Sjuggerud
Tuesday, June 23, 2009
Sometimes it's too easy. Sometimes, you're just handed an opportunity where you can make great profits and hardly lose money...
Opportunities like what I'll share with you today appear all the time. You just have to know where to look. It's how some of the world's smartest investors make money. Let me explain...
Start by taking a look at these two investments:
What you see is nearly identical performance over the last year. It's not surprising... RSX and TRF are funds that own essentially the same basket of stocks.
While these funds are extremely similar, on June 8, a crazy thing happened... One fund (RSX) traded at its market value, the other fund (TRF) traded at a near 100% premium to its market value. You can see it here...
TRF shares traded for $24, even though they were only worth $12.
The only real difference between the two funds is that RSX is an "ETF" – an exchange-traded fund – while TRF is a "closed-end fund." Here's the rub: ETFs never trade at much of a premium or discount... If there is big demand, more shares are created. But closed-end funds have a fixed number of shares, so they can trade at big premiums or discounts. This little difference created the opportunity.
You see, you can buy the ETF for par, paying $1 for every $1 of value. Then, when the matching closed-end fund trades at a huge premium to its net asset value – in this case, near 100% – you can "short" it and collect $2 for every $1 of value.
So you've bought something for $1 and immediately sold something similar for $2. All you have to do is sit back and wait for the crazy premium to shrink. Importantly, you've taken on no stock market risk. It doesn't matter what happens to the stocks in the funds.
That's because you're essentially buying and selling the same thing at the same time. If one portfolio goes down 20%, the other will, too. If one goes up 20%, the other will, too. Because you're "long" and "short" at the same time, you're fully hedged.
TRF and RSX don't hold identical portfolios, but as the first chart in this article shows, they track each other pretty well. Both these funds hold Russian stocks – some of the riskiest stocks in the world. Yet this example was a near risk-free way to make profits... You'd have simply bet on the record premium disappearing some day.
In this decade, TRF has generally sold for about 2% over its market value. So when you see it at a 98% premium, you have to act... you have to jump on it. And all you have to do is make a bet that it will fall down from a 98% premium by shorting it. And you "hedge" that bet by buying a matching fund to make it nearly risk-free.
Since June 8, the premium on TRF has fallen in half. Investors who shorted TRF are already up over 33%. And if they bought RSX while simultaneously short selling TRF to hedge the bet, they've made their returns without taking on the risk of the Russian stock market...
Now, you can't go into trades like this without some thought... Many closed-end funds regularly trade at huge discounts, so there's no trade there. Another important thing is you don't know when the trade will pay off. You have to be willing to wait for the normal relationship to return.
(You can track the premiums and discounts of closed-end funds at www.etfconnect.com by clicking on Fund Sorter.)
There aren't many things in this world where you can buy at $1 and simultaneously sell at $2. But the opportunities do appear. On June 8, you could have done it with RSX and TRF. Less than two weeks later, you'd already be sitting on a nice profit.
Once you get the hang of them, these "free money" ideas can make you a fortune...
Good investing,
Steve
P.S. This type of trading is not for everyone. It's a little more sophisticated than simply buying a stock – but it's easy once you get the idea. I'm working on a new product that will take advantage of many "free money" trades like this one. I'll let you know as soon as it's ready. |
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WHY OIL IS HEADED LOWER SOON
Kudos to supertrader Dennis Gartman for pointing out an interesting situation in the oil market right now...
In the past five months, crude oil has enjoyed one of its greatest rallies ever. The fuel is up 86% since mid-February. The rally came as a surprise to most people. Oil prices are dependent on the global economy... and back then, things looked terrible. Despite all the gloom, oil started climbing higher. It's a bullish sign when a market rallies in the face of bearish news.
On the other hand, it's a bearish sign when an asset cannot rally on bullish news. Well, oil just got an earful of bullish news when people took to the streets in Iran last week. The country is the world's fourth-largest oil producer... so a small ripple in its production sends shock waves across the oil market.
As Dennis pointed out recently, crude oil actually fell in response to the bullish "Iran is rioting" news. Last week, we pointed at the now normal reading of the gold/oil ratio and claimed the early, easy money had been made. With oil falling on bullish news, the path of least resistance for oil is down.
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If President Barack Obama gets his way, consumers who take out mortgages would automatically get a "plain vanilla" loan – such as a traditional 30-year fixed-rate mortgage – unless they opt for a riskier variety.
Obama's plan to revamp financial regulation aims to protect borrowers from the confusing and high-risk mortgages that fed a pandemic of delinquencies and foreclosures, led to the worst financial crisis in decades and thrust the nation into a deep recession.
Obama is expecting opposition to the plan, and cautioned Saturday in his radio address, "While I'm not spoiling for a fight, I'm ready for one."
– Newsmax
While the S&P 500 is still up 33 percent from a 12-year low on March 9, the index has fallen 5.1 percent since June 12. Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.
Insiders of S&P 500 companies were net sellers for 14 straight weeks as the market rallied, according to data compiled by InsiderScmaore.com.
The S&P 500 today slid below 900.8, its average level over the past 200 days, in a bearish signal to analysts who study charts to predict market movements.
Nouriel Roubini, the New York University economics professor who predicted the financial crisis, said the global economy may suffer another slump due to the potential "double whammy" of rising oil prices and widening budget deficits.
– Bloomberg
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Saturday, June 20, 2009
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Friday, June 19, 2009
These Tax Free Bonds are Still a Great Buy
Thursday, June 18, 2009
The Money Secret of Folkston, Georgia
Wednesday, June 17, 2009 |
How a sensible person views the price of gold
"I'm committed to a lifetime pattern of purchasing and I will never sell."
Gold has become awfully popular and, as you know, when any asset becomes very popular, that's usually a sign of a top. On the other hand, sometimes market fundamentals overpower market sentiment. I wouldn't be surprised if this is one of those times. |
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