ask me anything: part 3

Here we go with the third installment of the AMA answers. Today, I will present answers to a number of questions that I asked Craig to cover for me. I’ve taken Craig’s answers and edited them in my own way to add some color. No charts today, as these are more strategic or fundamental questions. We hope you find our answers to them informative. I expect to finish the series with a final blog that will be posted on Friday of this week or early next week. Anyhow–lets get at it:

Stock prices and option expiry days

Mark asks why stocks rise on options expiry days. He also notes that he has had some bad luck with a couple of trading decisions lately that were timed incorrectly. We will address the options expiry question next – but Mark, you need to take my Technical Analysis Course to get a firm understanding on how to enter trades with more success.

Regarding the options expiry question. Craig notes that options can rise due to the rolling of options. If an investor is hedging a position with options and those options expire, new options will be required. The options being purchased will have to be hedged by the seller (dealer).  This activity will naturally generate trading activity in the underlying shares. So…in a nutshell, options expiry see’s new options created, which forces dealers to generate activity in the underlying stocks.

Why do stocks trade heavily the day before they get added to an index?

Jim notes that “Whenever a stock is being added to the S&P/TSX Composite Index near quarter-end, an unusually large block of shares is traded just before the close on the previous business day “. He wants to know why that happens.

Craig explains: When adjustments are made to an index composition, shares are added or deleted. Often these adjustments are made ahead of time. A dealer may purchase the shares over a certain time frame for an investor (index fund). When the order is complete, the shares are crossed. This may happen at the close. Another scenario may be that the dealer agrees to sell the shares at the closing price, then cross them. Either way, activity rises on these trades.

I might add as well that ordinary investors, who become aware of a new addition to an index, can become more interested in the stock and generate a greater level of activity. All in, you are looking at greater volume on both professional and investor levels.

 

Is there enough electricity capacity to meet growing EV vehicle volume?

Russ asks if we can generate enough electricity to keep EV’s (electrical vehicles) on the road.

Craig notes that we are not qualified to offer a completely informed answer to Russ’s question. However, it is thought that at this time that there is not sufficient infrastructure to accommodate the projections some are making about EV growth.

My own thoughts – Will that electrical energy infrastructure grow? One might expect so. Nuclear power does appear to be the cleanest and most realistic way of meeting such demands. As such, this may present opportunities in rare earth metals and uranium. At ValueTrend, we do hold positions in some of the producers of these materials. You can learn more about rare earth metals on a video I recorded a couple of weeks ago here. As an aside, you may want to subscribe to the videos, given that I often cover topics like rare earth metals, China, and other topics not covered on this blog.

 

Preferred Split share Class A units & when to buy preferred shares and bonds

We got two fixed income questions, so I decided to bundle them together. Ron asks about Preferred Split shares. Are they worthwhile for income investors, or are they too risky? Randy wants to know if interest rate hikes are now “baked into” bond prices, making it a good time to start buying preferred shares and extending bond duration for those seeking fixed income investments.

Craig notes that split preferred shares are not an asset class/ product that is without risk. For example, a significant and often overlooked risk in many of these products is the limited liquidity that may be present. Lets face it. These are post-market products that were manufactured by external firms in an attempt to create new interest by re-arranging and dividing an existing structure. Beyond the original issue costs and potential fees, you are looking at a series of investments that are not in focus by the majority of investors and/or institutions. As such, the smaller pool of buyers and sellers can sometimes make these securities next to impossible to liquidate in times of negative influences on the underlying issues.

Regarding Randy’s question surrounding whether bonds have the upcoming Federal rate hikes baked in. This question seems to be about timing. Craig does not believe that the market for fixed income accurately reflects the future. There are many variables still likely to change. As a senior, perhaps you are looking for predictable cashflow from part of your portfolio. If the investment is priced where you are comfortable, and if you are confident your principal is safe – then fluctuation must be accepted. But it is difficult to predict if future rate hikes are known, or priced into the fixed income market at this time.

 

Coming soon: Final AMA answers

If I get the chance, I will post the last of the AMA answers on a blog this Friday. If that isn’t possible, I will post the final answers next Tuesday (I am out of the office on Monday).

Happy trading!

2 Comments

    • The ZEB units suggest a consolidation. Nothing indicating a breakdown yet

      Reply

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