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CMG and CMG-B is an arb that has been hyped for months in the blogosphere. When considering the cost of margin, this only proves my above point. By the time the spread closes, it doesn't matter that you "were right", in economic terms, your at a loss.
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<p>I don't present opportunities without doing that sort of analysis. One year forward price for CMG is (factoring in carry, repo) ~87 and CMG-B is ~82. Spread is still ~6% out. For a trade like this, spreads >4% based on the forward price is enough for me to play it. Because, A) it parks my capital (i have very few equity positions in the market atm) B) when spreads reach that size they tend to collapse in much shorter times for me to realize a bigger gain. The primary reason for me posting this was to show that inefficiencies do exist in equity markets. </p>
<p>I posted about MWA/MWA-B as well on another forum. I was actually in it but bailed after finding CMG. After factoring in one year carry costs you actually make only 1.25% (although I expected a spread collapse in a quarter once I saw the numbers) when I last ran the numbers. Edit: Yep, the spread did fall significantly. Spread is down 38% from when I had first identified it at 1.22. There was quite a bit of time to enter at much better spreads as well (I know of one guy who did really well playing this...in percentage terms of course, finding shares to short is hard as hell for these sort of plays). </p>
<p>Yea I am familiar with that piece of literature. While it does present a nice way of seeing one sort of agent interaction, with more analysis you can find opportunities in shorter time periods as well. Check out the work of Richard Olsen who has been a big proponent of heterogenous market structure. </p>
<p>Here is another example of structural influence in the markets: Just as the fact that most managers pursue calender year returns (leading to various phenomenon such as the old January effect, end of quarter effect etc), there are structures in place in the high frequency space as well. If you study a 24 hr market (FX) you will find that price action varies as traders in one country roll out of bed, go to lunch, get out of work just as another set of traders enter the market. The intraday space provides a lot more data to play with those sort of ideas.</p>
<p>Of course, most average pikers aren't going to have the time, energy, or skill to be in this space. They are better of playing index funds. My point was that there are inefficiencies in the market that can enable someone to generate excess returns. There are actually quite a few opportunities present to small investors that big guys can't take advantage of (due to size and regulatory barriers). </p>
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Again, if my strategy faulters, a large loss wipes away all my hard work, as it's the geometric average that matters in the real world. Not enough traders look at low probability events.
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<p>People have a tendency to view the world in terms of "probabilities" (read: consistency) instead of expected values.</p>
<p>One well known example of the type of strategy you describe is option writing. There are a ton of funds who have jumped into this space in this low vol environment. The lure of consistent cash is enough for them to play a game which actually has a negative expectancy as any major event will cause them to lose all their months of "profits" and then some. </p>
<p>A well known strategy on the other side of the fence is trend following. Lots of small losses but their goal is to catch trends large enough to offset the losses and some. These guys position themselves to take advantage of tail risks while premium sellers expose themselves to it. As markets are fattailed, there are many more trend followers with >15 year track records than premium writers (nearly all the ones I know have been founded around 2000).</p>
<p>In regards to BIDU etc> I am not going to argue whether it will go up or down. However, SouthPasadena doesn't exactly have a sound trading methodology. How did you figure out that the fair value of whatever you are looking at is greater than where its trading at now? Most "gurus" base their investment decision on how X factor will increase something be Y. But rarely have I seen them actually creating a rough estimate of what the fair value of that particular stock should be and comparing that to the present prices to see if there is an opportunity. "Taking advantage of the moment" is a given in any situation...anyone can predict the past but it doesn't earn them jack. The question is what exactly are you taking advantage of, what exactly is the "pocket of opportunity" you are exploiting?</p>