The Secret Broker: What to rub when your portfolio gets a cold
The Secret Broker
The Secret Broker
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After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.
When winter sets in, Mrs Broker always grabs a tub of Vicks and rubs it into everyone’s chest, back and on to the soles of their feet.
It wards off any approaching ‘flu symptoms, according to her grandmother.
When the kids aren’t around I always ask her if it’s possible to get a ‘rub and tub’ tonight, before she tucks me in.
That cheeky request would come in, after my Grandad’s remedy of (a few too many) ‘hot toddies’, which consist of hot water, a squeeze of lemon, a spoonful of honey and a heavy handed dram of my best single malt.
At least one of us gets a giggle out of the winter blues setting in. After all, I’m the one chopping and stacking the wood for the fireplace, whilst everyone is nice and cosy inside.
However, when the cold winds are approaching the old portfolio, I also reach for the Vicks but this time it is spelt VIX. She’s rummaging around the medicine cabinet, I’m rummaging around the ASX’s website to find their take of the VIX.
The ASX’s VIX is their ‘Volatility Index’ and it gives you an indication of how things are going in ASX land. I always reach out for it when I feel a sniffle coming on in the portfolio.
For example, on Thursday of this week, the S&P/ASX200 fell 101.40 points to 7,019.70 – a fall of 1.42%.
Over the previous five days, the index managed to lose 2.18% and at that point in time it was sitting at just 3.87% above its 52-week low.
By formulating these movements into a ‘volatility index’, it allows for one to calculate and study to see if the portfolio’s sniffle is becoming the ‘flu or God forbid, pneumonia or COVID.
As the market falls, the index goes up and the VIX is used in calculating the pricing of what premiums to charge on stock options when quoting them live.
Here is Thursday’s index movement captured as a % of that volatility:
Note the 52-week low was 9.66%, when the market was 100% fit and doing very well and the 52-week high of 24.34% was when it had caught pneumonia and COVID at the same time.
The percentage shown as 17.04% is how far it is away from the mean average of the ASX 200 over the previous 52 weeks.
At its 52-week high, the market was 24.34% away from its 12-month mean average.
As a trader, if you are quoting options 30 days forward, you take the 17.04% and times it by the square root of time, which would be the square root of 1 over 12 (as in 12 months of the year or 30 days).
In this example of 17.04%, calculating this to an option priced out 30 days forward would mean adding an extra 4.7% to its time premium.
So as a trader, you are expecting the ASX 200 to move +/- 4.7% away from the ASX 200 mean average for the year and you price this in.
If you delve deeper down the rabbit hole, a 30-day call option can go up in price even if the underlying stock hasn’t moved in price.
If you were equating this to a house worth say $1m and a buyer wants a 30-day option from you at that price, then you can charge them $4,700 for that 30-day fixed price period.
Now, thanks to the idiots at the RBA, who were too slow in moving interest rates up to fight inflation, the volatility they added to share price movements was more than just COVID.
No matter how much Vicks Mrs Broker could rub into the market, the cold winds and the airborne virus that comes with those winds can now not be abated.
The ASX 200 VIX has moved up 21% over the last five days, going from 14% to 17.04%.
Volumes in shares in traded companies, like CBA, have more than doubled their normal daily average from 2.30pm on Tuesday, when the RBA announced their belated interest hike.
CBA has gone from $103.08 to a low of $92.90 in just two days, FFS.
That’s a 10% movement downwards and wiped out $16bn of its valuation.
Or put it another way, the valuation of Australia’s largest bank has fallen 10% in two days.
This weekend, I’m off to Martin Place on behalf of everyone in Australia, with the biggest tub of Vicks I can find so I can rub into the undies of the RBA governor. He might get a real feel of the pain he has inflicted on us all.
Now I know how Basil felt after he got Mr O’Reilly to do some repairs on their hotel and against Sybil’s advice.
Feel free to contact him with your best stock tips and ideas.