The Basics of Options Contracts
(Jan 2013)
In a lot of our research work, we break down complex financial products into simpler pieces and then value those simple pieces one at a time. Often, those smaller components are options contracts (especially in our structured product work), which are relatively easy for practitioners to value. However, options contracts use a peculiar terminology that can be confusing to the uninitiated, so we thought we would lay out exactly what we mean when we talk about options.
Options contracts are...
SLCG Research: Dual Directional Structured Products [Update]
(Jan 2013)
We have significantly updated our working paper on dual directional structured products (or simply dual directionals). Since our first version of the paper, our work has been covered by RISK.net and in November of 2012 RISK.net named a dual directional as their trade of the month. The latest version of the paper is available from the SLCG website and SSRN.
In this version of the paper, we expanded our scope by studying all dual directionals registered with the SEC since 2008. We divide dual...
Structured Products: 2012 Year-End Market Review
(Jan 2013)
Last year, we covered Bloomberg's summary of the 2011 structured product market by noting that almost "$45.5 billion worth of SEC registered structured products were sold in the US in 2011, down only slightly from $49.4 billion in 2010." In 2012, 7,909 notes totaling just over $39 billion worth of SEC registered structured products were sold in the US -- a decrease of nearly 15%.
Interest rate products continued their decline in popularity with a decrease of almost 30% from 2011 to 2012....
SLCG Research: Volatility Smiles from Leveraged ETF Options
(Jan 2013)
Leveraged ETFs are a perennial subject on our blog. I thought I'd take this opportunity to highlight a recent research project entitled "Crooked Volatility Smiles: Evidence from Leveraged and Inverse ETF Options" that I recently completed with my colleagues Geng Deng, Craig McCann and Mike Yan.
While studying options data on leveraged and inverse ETFs, we began to notice a pattern such that deep-in-the-money call options -- contacts whose strike price is well above the current spot price --...
SEC Litigation Releases: Week in Review - January 4th, 2013
(Jan 2013)
SEC Charges California Company and CEO with Defrauding Investors in Nevada Gold Mining Venture
January 3, 2013, (Litigation Release No. 22585)
According to the complaint (opens to PDF), Nekekim Corporation and its CEO, Kenneth Carlton, "induced hundreds of investors to pour $16 million into a fruitless gold mining venture." From 2001 to 2011, the defendants attracted investors claiming that a physicist (who in reality "had no scientific training") helped "develop a confidential gold extraction...
SEC Litigation Releases: Week in Review - December 28th, 2012
(Dec 2012)
SEC Charges Two Brokers with Insider Trading
December 26, 2012, (Litigation Release No. 22581)
This week the SEC filed an amended complaint (opens to PDF) charging research analyst Trent Martin with tipping brokers Thomas C. Conradt and David J. Weishaus with nonpublic information about IBM Corporation's acquisition of SPSS Inc. Martin learned of the impending IBM-SPSS transaction "from an attorney friend who was working on the deal." Martin, Conradt, and Weishaus allegedly traded on the...
Auction Rate Securities Responsible for $9.6 Billion Loss to Taxpayers
(Dec 2012)
In a complaint filed in Nevada against Goldman Sachs last year, the city of Reno states that it issued $73.45 million of Auction Rate Securities (ARS) in 2005 and $137.43 million ARS in 2006 on the advice of Goldman. Like many other municipalities, Reno subsequently saw the market crash in 2008 and yields skyrocket, leading to a $9.6 billion loss for issuers.
The ARS structure was promoted by Goldman as liquid, cash-equivalent investments that would allow Reno to borrow money for long term...
Traded and Non-Traded REIT to Merge
(Dec 2012)
Earlier this week, American Realty Capital Properties (ARCP), a traded REIT under the American Realty Capital (ARC) family of real estate investments, announced that it will be merging with American Realty Capital Trust III (ARCTIII), a non-traded REIT in the same family. Investors in ARCTIII will be entitled to either $12.00 in cash or $12.26 per share in ARCP stock, a significant premium over the $10 per share purchase price.
This merger is remarkable for a number of reasons. While the...
