BTU Short Call Vertical

Today a fellow trader suggested a fundamental reason for getting bullish on BTU after the next pull back.  Since there’s an expectation for a pull back then we need to take a look at this.


BTU has been in a down channel since February.  Something may change eventually, but until it breaks out of the channel it’s still in a long term down trend.  Two days ago it touched the trend line with a long legged doji pattern.  The next day it closed below the doji and the previous day’s open.  A reversal may be starting.

The MACD has started to roll over, Stochastic, and RSI are also pointing down.  PPS is also giving a sell signal.  There are only 11 days left in July  so that may be taking on too much Gamma.   The Implied Volatility is 61% in August which is close enough to July.  Today we decided to go with a short call vertical with the short strike around 30 delta.  The Aug 26/27 spread looks the most interesting.  We managed to get a fill at .32 per spread just below the highs of the day.  Today the spread closed up 6% from BTU dropping over 1.00.

XRT Unbalanced Butterfly

XRT is the Retail sector ETF and has been as low as 56 after failing a double top breakout at 63.

It could be possible to sell a call spread against XRT, but there’s another strategy that can be tried.  Instead of a regular Butterfly we can look into the 61-62-64 broken wing butterfly for a 0.15 Credit.

This has some interesting properties.  The P/L graph in red is for August expiration on 8/18.  Notice that if the underlying ETF goes below 61 it’s still above the zero line meaning it’s possible to make money no matter how low it goes.  Between 61 and 63 the P/L turns into a pyramid and then drops off sharply after 63.  This is a strategy that one would want to use if you are confident the underlying will not go above the outer wing of the Butterfly.  You’re hoping for it to stay stuck in the sweet spot between 61 and 63, as close to 62 as possible by 8/18, but if it drops off from here, there’s no risk to the downside.

Court of Justice Of The European Union Rules On Used Software Sales

In a recent release from the Court of Justice of the European Union has ruled that the author of software can not prevent the resale of that software on the used market.  The case involves UsedSoft who sells used software licenses.  Consumers of these licenses then download the software from the creator’s website.  Oracle ($ORCL) had sought to block this practice.  The court has ruled that a copyright holder who sells in the EU loses the right to oppose the resale of the intellectual property.  The ruling applies to both physical copies and to downloaded copies of the software.  It also nullifies any language in the license agreement binding the purchaser to not resell the software.  It also entitles the purchaser to updates and patches for an unlimited period.  If the creator updates the software, the license holder is has the right to obtain those updates even if the maintenance agreement is for a limited period.

This has some interesting business implications in the EU.  Companies can now buy used software at a fraction of the cost of going to the creator.  UsedSoft is only selling the license.  Malware should not be an issue since the license holder is entitled to downloads of the most recent version from the software vendor’s website.  This new ruling can benefit companies of all sizes who have an office in the EU.  Open Source solutions are useful in some circumstances, but an ERP system will most likely be a commercial purchase due to capabilities and workforce experience with a particular platform.  Another interesting implication is for multi-national companies to consider running their IT operation out of their European subsidiaries.  Since a legal entity in the EU would be making the purchases of used licenses they would fall under the coverage of this ruling.  Offices outside the EU could “outsource” their IT needs to the European subsidiary.  The accountants and attorneys would need to determine the best structure for that business.  It is unlikely that a company would open a European subsidiary for the sole purpose of taking advantage of used software licensing; however, if a European office is in your company’s future, software will be much cheaper in Europe.

From an investment perspective, this may somewhat disruptive and will push companies to pursue a SaaS model if revenues from new boxed/downloaded software begin to decline.  If legislation in other countries allows for this it could be very bad for traditional software sales.  Entrepreneurs should take note if there is legislation in your country that has a possibility of passing.  Setting up a used software business could be quite lucrative like the used CD/DVD business was, but in this case electronic distribution is covered as well so it should have even better longevity.

FB Strangle Trade

This is another example of using small sized strangles as an income strategy.  This is an Aug 27/39 Strangle in $FB.  The trade was opened on 6/27 for a .95 and .70 credit on the two strikes.  Implied Volitility for August was at 62%.  These two strikes were selected at the 20 Delta level.  The area on the risk graph is very wide giving a good chance for being successful.  One week after putting the trade on there’s approximately a 30.30% gain due to Theta and a 5% reduction in volatility.


Preparing For The Next AMZN Cloud Outage

Amazon ($AMZN) made headlines over the weekend with the regional failure of AWS.  We won’t go deep into the details of what happened or who was affected since that has been covered by many other outlets.  In general, a incident caused loss of service in a particular region.  The service providers were not able to deliver to their customers during the outage.  While it is sexy to call it a cloud failure, the same end result could have occurred with any single site implementation.  Hosting in your own data center, using the co-lo facility downtown, or an unfortunate GoDaddy location could cause your net presence to disappear.

Business leaders should evaluate what needs to be improved or changed in terms of resiliency.  Decisions will need to be made based upon the size of your business and what your concerns are.  A nano cap company (sub $50M market cap) will most likely have different requirements than a Large Cap global enterprise.  Rather than invent the wheel, you can make use of frameworks to organize your activities.  There are many out there, but today we will focus on ISO 27001 and ISO 22301.

Business Continuity is a component of ISO 27001, while ISO 22301 attempts to address Business Continuity as a whole.  Section 4.2.1(d) of ISO 27001 requires that you identify the assets of the in scope portion of the business and the business owners of these assets, the threats to the assets, vulnerabilities that might be exploited by the threats, and the impacts to confidentiality integrity and availability.

Conducting a risk assessment in its most rudimentary form is a good exercise for any business of any size.  The information that you put together as part of the risk assessment can be useful in other areas as well, such as obtaining the right insurance coverage at the right price.  Fire or flood could impact your data center or it could impact manufacturing and logistics.  Knowing this up front, you can take action to mitigate those risks or accept those risks.

Not everything needs to be corrected or addressed in some way, but having a running checklist of issues can be a good road map.  A pizza restaurant with an online shopping cart may not care if the cloud provider of their online order application goes down.  There’s always telephone, fax, and walk-in that will keep the business running.   Cash flow, CapEx, OpEx, and other business drivers will influence the need for availability.  Not every business will need multiple data centers if they are self-hosting or multiple availability zones in the cloud.