Macro Tourist

One Trader Uses An ‘Absolutely Nuts’ Situation To Illustrate How Inefficient Markets Can Be

"Let’s put it together. This closed-end fund invests in FAANG-type stocks and then shorts volatility against it. Yup, nothing to worry about there."

"Let’s put it together. This closed-end fund invests in FAANG-type stocks and then shorts volatility against it. Yup, nothing to worry about there."
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2 comments on “One Trader Uses An ‘Absolutely Nuts’ Situation To Illustrate How Inefficient Markets Can Be

  1. Richard Daskin

    This one really caught my eye. I am an RIA and I use closed end funds extensively in my practice. Closed end funds are a small poorly followed market and are retail oriented. Inefficient does not do justice as a description in this area of the financial markets. Besides being able to find bargains for clients CEFs are a great way to use price discovery to observe overbought markets. QQQX caught my eye since at one time I held this fund for clients. Sadly, I sold this fund when it got to about a 3-5% (it is bigger now as the article points out) premium and reinvested in another tech oriented fund BST about a year ago. BST also was a moon shot and traded to a premium. I promptly sold it. It went to an even higher premium. What is particularly egregious about QQQX valuation is that it writes options against its index so over time the premium will be forced to decay even in a flat market. Lately the average premium of closed end funds have declined and this is often an indicator of an over enthusiastic market. On the other hand, many fixed income funds are trading at larger than normal discounts. Odds are equities are somewhat overbought and fixed income oversold.

    • monkfelonious

      Daskin, thank you for the comment. I’ve cudgeled my brains over CEF’s, even (unsuccessfully) playing them some. You have provided some information that helps understand,especially the part about the equation between premiums overbought/undersold vis-a-vis this market. It seems to me that CEF’s either kill it for a time, go sideways forever or placate with return on capital.

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