Colombia Central Bank Sells $180 Million of Dollar Put Options

sloopskipper says on Feb 20, 2008, 08:26:

bump

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Buongone says on Feb 20, 2008, 09:46:

Bump ???

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rocinante says on Feb 20, 2008, 09:48:

bump!

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Not that the US president actually runs the US." Feb 5, 2008

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Monpirri says on Feb 20, 2008, 09:51:

bump!!

The life spam of a taste bud is ten days

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pedro says on Feb 20, 2008, 09:56:

Baby turn around,

And let me see that sexy body go...

que nota!

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rocinante says on Feb 20, 2008, 09:59:

bump!!!

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Not that the US president actually runs the US." Feb 5, 2008

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rocinante says on Feb 20, 2008, 10:00:

bump!!!

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Not that the US president actually runs the US." Feb 5, 2008

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Lowell says on Feb 20, 2008, 10:08:

bump!!!!

Alfred E. Newman. "What. Me Worry?"

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Alma del Norte says on Feb 20, 2008, 10:40:

BUMP!!!!!

La vida es una rutina

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RAAAY says on Feb 20, 2008, 12:03:

Bump off........

.........Its useless to argue with ignorance

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Frank Rizzo says on Feb 20, 2008, 12:24:

I didn't know banks would sell options for a cash position...they must be fairly confident that the dollar will continue to weaken... i wonder how much time they sold....??

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sloopskipper says on Feb 20, 2008, 13:39:

bump

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jh816 says on Feb 20, 2008, 15:45:

Check out the site below for rules adopted by the central bank for these options.
http://www.banrep.gov.co/econome/reglam/i_centralbankint.pdf

I've never heard of central banks doing this to control their currency. I've got quite a bit of experience in the options markets, but would have to look into this a little more to pass judgement. It looks like the options have a one-month time horizon. The thing with selling option contracts though is they entail an unlimited amount of downside risk and a limited amount of upside potential. Basically, the most the bank could gain is the $180 million paid as premiums, but could lose a great deal if something were to happen to change the exchange rate suddenly.

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jh816 says on Feb 20, 2008, 16:00:

A more thorough explanation and analysis of what they are doing and how it worked between 1999 (inception) to 2003.

http://www.bis.org/publ/bppdf/bispap23i.pdf

It seems to work fairly well as a means of stabilizing reserves when the 20-day moving average fluctuates. I'm still a little uneasy that the govt. would take such a risky stance, but it is a short-term move and they have inplace a few safeguards.

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Frank Rizzo says on Feb 20, 2008, 16:02:

I hear ya jh816....as you know, the put sell is the cheapest...position..they claim the 180 and they don't have to unwind thier position, it just expires if they sold 1 month....that's not too bad... I'm sure they put in some stop gap in to sell some calls at a certain point if the dollar started to take off the other direction (or buy puts back at an interum price). In any event, they sold a ton of contracs... That way they would limit their downside... I'd love to know what they know...

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manINred says on Feb 20, 2008, 20:30:

Interesting. Mind you, I can't think too hard about the implications of such a move, any more macroeconomics for me and my head will explode

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Frank Rizzo says on Feb 20, 2008, 22:02:

they just sold puts (you don't have to own them first) with 1 month time....took the cash....no exit is necessary so they hope to just let them expire....

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Robert Jorge says on Feb 20, 2008, 23:26:

I'm confused also - but that isn't unusual. I have trouble grasping the concept of a put anyway. Then, tie that in with the above topic, I am lost.

He who farts in church, sits in his own pew.

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Frank Rizzo says on Feb 20, 2008, 23:32:

Hi RJ...... nawww...it's just standard options trading...you sell the option for "someone to put the stock to you" for a price...so....say the stock is trading at $100 USD..... and you think it's going lower... you can sell put contracts at $100 for so much....per contract x1000 per contract.....then you take that money in your account.... if the stock goes down (that's what you're betting on).... then no one would want to PUT it to you at $100...'cause they can buy it lower now on the open market....so they would not opt or put it to you....and you would capture the initial money you sold the put for....ie...no unwind position...you just have one fee to enter into the transaction and it unwinds with time...(you sell the put based on time...ie. months..ie. long and short plays on puts)....

These guys are serious pros....therefore they had buys on puts and sells on calls as a play to stop any losses as well.....

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Robert Jorge says on Feb 20, 2008, 23:55:

Yep - I am totally lost. I will study your post again tomorrow Frank. Thanks for taking the time to explain the concept to me. So far, the only thing that I think I might understand is that a put is like betting on something going down in value.

He who farts in church, sits in his own pew.

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Frank Rizzo says on Feb 21, 2008, 00:04:

Hi RJ...it's not that complicated...the traders just want you to think it is..basically if you think something is going DOWN..you...BC and SP (buy calls and sell puts).... if you think it is going UP...you BP and SC (buy puts and sell calls).....

That's the general play...then you have to look at time (how much you buy or sell)....

It's nice to talk about...but more often than not....it's the big black hole....trying to suck your money down........con mucho cuidado senor...pfvs...

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Frank Rizzo says on Feb 21, 2008, 00:07:

...you can buy and sell both calls and puts.... the plays are 4 fold and 2 ways in each direction.

Rubito..youre right ...if you BUY a call...you have the right to buy...but if you SELL a call...someone can call you on that price you sold it at for your time.....so it depends....

calls and puts go both directions depending if you sell or buy....

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Robert Jorge says on Feb 21, 2008, 00:31:

Rubito - I think I almost understand .... I appreciate the response in simple language. Frank - ditto - I appreciate your explanations. But, your last comment overwhelmed my pea-brain. "4 fold - 2 ways each direction, right to buy, so it depends" ....... I give up tonight. I'll check back tomorrow night. See you guys later. Thanks again for your patience.

He who farts in church, sits in his own pew.

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rocinante says on Feb 21, 2008, 04:24:

Sorry Frank, with all due respect there are a handful of mistakes, even in your options 101 example.

"basically if you think something is going DOWN..you...BC and SP (buy calls and sell puts).... if you think it is going UP...you BP and SC (buy puts and sell calls)....."

This is the exact opposite - reverse UP and DOWN if you want this statement to be accurate.

"you can sell put contracts at $100 for so much....per contract x1000 per contract.....then you take that money in your account.... if the stock goes down (that's what you're betting on).... then no one would want to PUT it to you at $100...'cause they can buy it lower now on the open market....so they would not opt or put it to you...."

Holy shit! You got it all backwards. If you sell the put you are betting ther underlying stock will go UP. Again I quote from the same passage "if the stock goes down (that's what you're betting on).... then no one would want to PUT it to you at $100...'cause they can buy it lower now on the open market"

Yes the buyers of the puts you sold DO buy it lower on the Market ($93) and DOOOOOOO PUT IT TO YOU (for $100). That's the whole point of the Put buyer is to lock in the higher price and "put it" to the put seller at that higher price when the stock does go down by buying it on the open market. (some just trade the contracts - another thread)

"I didn't know banks would sell options for a cash position...they must be fairly confident that the dollar will continue to weaken... i wonder how much time they sold....??"

The bank is fairly confident that the dollar will NOT weaken - or that it will "hold steady" and stay out of the money, so the options they sold to the BULLISH investor ($180 Million vs $500 million of open interest/bids) will expire and the bank makes cash.

"Long is betting on something increasing in value, short is betting on it going DOWN" -Rubito

So Rubi I'm betting on something increading in Value when I am LONG PUTS?

I'm betting on it going DOWN when I am Short Calls?

You are right if we are just talking long vs short straight positions - but we are not - this is currency options post from top to bottom.

No offense to either of you two but if anyone wants to gain something regarding options erase these posts from memory.

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Not that the US president actually runs the US." Feb 5, 2008

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sloopskipper says on Feb 21, 2008, 07:09:

Robert Jorge, I'm with you. I had a series 7 (NASD/NYSE stock broker's license) series 66, and Pennsylvaina LA&H license and only understood enough of that stuff to pass the exams, and that is all long forgotten.

Needless to say, I never touch them, or even simple shorts.

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rocinante says on Feb 21, 2008, 07:15:

7, 3(commodities) ,4(ROP),24 (Principal) and Blue Sky'ed in 20 states. My licenses expired 3 years after I moved to the IT side, never kept them active although I always worked for member firms. I can just take the tests again if I decide to go the front office in the US - I have no desire to do that.

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Not that the US president actually runs the US." Feb 5, 2008

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jh816 says on Feb 21, 2008, 07:26:

options can be good instruments for hedging a position (helping to mitigate risk on an investment) but naked option investments are a quick way to lose a lot of money because of the leverage involved.

Roci has the dynamics correct. When they SELL puts, the central bank is betting that the dollar stabilizes relative to the peso. Basically, they use these option auctions when the exchange rate has moved more than 4% in a 20 day period. I didn't calculate the statistics, but I'm guessing 4% is at least close to two standard deviations, so further moves would be statistically improbable. When the bank sells puts, they are selling investors the right to sell dollars if the price drops further. This is more of a hedge position because the bank buys and sells the currencies anyway to help stabilize the rate.

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rocinante says on Feb 21, 2008, 07:29:

Options are a tremndous hedge - specifically if you are dealing in receiving foreign currency payments on business transactions that are payable in net terms over time. Or for the individual, if your portfolio has a high beta to a foreign currency (not a good idea) you can offset that exposure by purchasing options on that currency. It's like an insurance policy. The currency moves away from you, resulting in a lower value in your portfolio but you make money on the option.

I'm suprised no one grabbed onto this from the original post: "Colombia's central bank sold dollar put options for a second time this year to reduce fluctuations in the peso."

How does the tail wag the dog? How does the central bank writing options reduce fluctuations?

Realize that the 180 million paid in premiums is not meaning that only 180 million worth of USD are in play. That 180 million paid - especially if only a short expiration/time value probably means about a billion USD being controlled.

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Not that the US president actually runs the US." Feb 5, 2008

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rocinante says on Feb 21, 2008, 07:31:

JH816 - Well you answered my question about Central Bank "writing options to reduce fluctuations" before I posted it! There is another piece of the strategy that is not posted in the original article.

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Not that the US president actually runs the US." Feb 5, 2008

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rhydewithdis says on Feb 21, 2008, 07:42:

if they are selling naked put options they are LONG on the dollar and looking for it to appreciate otherwise they will lose money.

edit: to add that as Rubito already pointed out Frank Rizzo is stating everything backwards.

They said I couldn't play football I was too small / They say I couldn't play basketball I wasn't tall / They say I couldn't play baseball at all / And now everyday of my life I ball.

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Frank Rizzo says on Feb 21, 2008, 08:15:

Hi rocinate..... and others...i'm no licenced stock trader....and it's been years since i've ever played with this....so my apology for confusing people.... after reading your post..youre exactly right..i had it exactly backwards....again my apology for speaking up when i should have just kept my mouth shut.... again , my apology...

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pedro says on Feb 21, 2008, 08:19:

The mandate of the central bank is usually to provide liquidity in their currency's market and smooth out the volatility.

If the market moves strongly in one direction (supply/demand imbalance), the central bank steps in and adds extra demand or supply, whichever was lacking.

I am not sure if they have a target price on the currency pair, or if they just want smooth transitions. In any case their mandate is not to make money on trading.

No "view" can be ascribed to their actions. In a scenario where even a blind man can see that the dollar is getting smashed vs the peso and the price is moving hard, the central bank will step in and take the *other* side of the transaction.

Looking at the article, they have well defined rules of engagement about what triggers an intervention (at least as far as options are concerned). This takes the interpretation out of the equation, making the "view" of future market activity less important than the mechanics of providing liquidity in a disinterested way.

que nota!

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jh816 says on Feb 21, 2008, 10:20:

Roci, gotta ask. Where's the quote from "World economic indicators..."? I'd agree that Obama will probably get the nomination, but I think he has a long way to go to beat McCain.

More though is the "1400 by November." That's a 26% move from the rate as it is now, let alone from the 2000 it has been hanging around. I can see maybe 1800 or as low as 1750, but just don't see economic factors (or the government allowing such a steep decline) pushing it down that low.

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sloopskipper says on Feb 21, 2008, 15:01:

jh, don't count on McC being a shoe-in. Seems he might alienate for of the Bible-Thumpers, read:

THE LONG RUN
For McCain, Self-Confidence on Ethics Poses Its Own Risk
By JIM RUTENBERG, MARILYN W. THOMPSON, DAVID D. KIRKPATRICK and STEPHEN LABATON
As his relationship with a female lobbyist underscores, John McCain’s confidence in his own integrity has sometimes seemed to blind him to potential conflicts of interest.
http://www.nytimes.com/2008/02/21/us/politics/21mccain.html?th&emc=th

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tomtom33 says on Feb 21, 2008, 15:09:

He's far from a shoo-in, but that Times article falls quite a bit short of establishing anything.

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sloopskipper says on Feb 21, 2008, 16:17:

You think? Hero, or not, he comes across as a scumbag, to me. A natural replacement for GWB.

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tomtom33 says on Feb 22, 2008, 03:00:

Power corrupts. If they weren't scumbags to begin with, it doesn't take long. If you don't want to vote for a scumbag, don't vote.

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jh816 says on Feb 22, 2008, 04:10:

ahhhh, good ol' american skeptiscm. That's what I miss. Anyway, getting a little off topic, thought I might start a new thread for McCain vs. Obama

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tomtom33 says on Feb 22, 2008, 04:37:

Yes, we turned a bit off-topic here, but at least we haven't rung up 100 posts about conspiracy theories...yet.

Actually I kind of like some of the scumbags. Politics is very similar to sausage making. And there is no one without at least an impure thought. Ask Jimmy Carter.

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rocinante says on Feb 22, 2008, 07:52:

JH816 I emailed you. LMK...

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Not that the US president actually runs the US." Feb 5, 2008

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