I'm perplexed by why BDRY keeps falling while consumer spending is up and the economy is doing well. After some digging here are some explanations:
1. A substantial drop in dry bulk shipping rates. As of December 11, 2024, it fell to 1,106 points, marking its lowest level since September 2023. This decline reflects reduced demand for shipping capacity and lower freight rates.
2. Oversupply of Shipping Capacity: Fleet Expansion: In 2023, approximately 32 million deadweight tons (DWT) of new dry bulk vessel capacity were delivered, with an additional 30 million DWT expected in 2024. This increase in supply has outpaced demand, leading to heightened competition among shipowners and driving freight rates down.
3. Geopolitical and Operational Challenges: Rerouting due to Red Sea Instability: Attacks by Houthi rebels in the Red Sea have forced vessels to take longer routes around the Cape of Good Hope, extending voyage times and disrupting schedules. While this has temporarily increased demand for shipping capacity, the associated operational challenges have contributed to market volatility.
4. Commodity Demand Fluctuations: Iron Ore and Coal Shipments: Projections indicate that iron ore shipments will grow by 3.0% from 2023 to 2025, while coal shipments could decline by 4.0% by 2025. These shifts in commodity demand directly impact the volume of goods transported by dry bulk carriers, influencing freight rates.
5. Economic Growth Projections: Forecasts suggest that global GDP could grow by 2.9% in 2024 and 3.2% in 2025, below the average annual growth rate of 3.7% observed between 2010 and 2019. Slower economic growth can lead to reduced demand for raw materials, affecting the dry bulk shipping industry.
So, while consumer spending and certain economic indicators remain strong, the dry bulk shipping sector faces specific challenges, including declining freight rates, fleet overcapacity, geopolitical disruptions, and fluctuating commodity demands. These factors have collectively contributed to the recent underperformance of BDRY.
thank you for this, Bill. It saved me a lot of time on research. Baltic Dry as an indicator has a lot of false negatives -- one would be under-invested if one followed it exclusively. Happily, I haven't noticed so many false positives. We'll see how this transports in 2025.
A happy and prosperous new year to you and yours, Bill!
Thanks for another excellent article, Martin. I especially liked “keep your knees flexed, your ear on the record player, and your behind near a chair.”
Two indicators I use that have me concerned are ‘NYSE Percent of stocks above 200 day moving average’ and ‘NYSE Advance-Decline issues’. They are both below the line I use for evaluating. Guten Rutsch to you too!
You might consider portfolio hedging with a Collar option strategy. You sell a call above current price and buy a put below current price with the same expiration. Of course you are long a portfolio of stocks/ETF’s. Try to match the premium you collect from selling the call to that for buying the put (not too hard to do). I use the expected move to determine my strikes.
Yesterday I put on the following IWM hedge at zero cost (actually 0.01 credit)! Expiration: 2/21/2025 Short 235 call, $2.86 credit. Long 210 put, $2.85.
To be honest, I have never seriously concerned myself with options, so this is something I'll put on my 2025 resolutions list.
Why did you hedge IWM as opposed to SPY or QQQ? Is is because IWM advancing would be a serious indication of the bull market continuing into its next phase? On the other hand, how would IWM be significant if it dropped from here?
Hi Martin, I did not indend on writing a full blown article, but it ended up being one!
I have a sizable position in mid-cap stocks, which is why I hedged using IWM. Hedging with SPY or QQQ works similarly. When I placed the hedge, IWM was approximately at 222. If the market drops below that point, my long put gains value, while my short call loses value. Both outcomes are favorable from an options standpoint. However, the value of my mid-cap stocks (using IWM as a proxy) also decreases. This means that while my options position does well, my stocks are losing value, effectively offsetting each other—hence the hedge.
It’s important to understand the concept of “Delta.” Delta measures how much an option’s price changes relative to a $1.00 move in the underlying asset. For example, if IWM falls by $1.00 and the option has a delta of 0.30, the option’s price will change by $0.30. This is referred to as a 30-delta position. As the price moves closer to the strike price, delta increases up to approximately ±50. Conversely, as the price moves further away from the strike, delta decreases. On expiration day, delta approaches ±1.00 for in-the-money (ITM) options.
Currently, my position is as follows: long a bunch of mid cap stocks, long puts at 210 and short calls at 235. Here are some scenarios to consider:
Scenario #1: Market Falls Below 210
If the market price drops to 200 at expiration, my losses are capped at 210 due to the protective put. In this case, I make $10 per contract on the long put, which helps offset the decline in my stock holdings. Additionally, the value of the short call drops to zero, resulting in a 100% profit on the short call.
Scenario #2: Market Remains Between 210 and 235
If IWM remains range-bound between 210 and 235, both options expire worthless. In this scenario, I incur no loss, as this was a zero-cost hedge.
Scenario #3: Market Moves Above 222
If prior to expiration IWM moves above 222 (the price when the position was initiated), the short call at 235 begins to lose value because the market is moving closer to the call’s strike price, increasing the likelihood of assignment. Simultaneously, the value of the long put at 210 decreases because the market is moving further away from the put’s strike price, reducing the probability of the put being ITM. This creates a double "temporary" loss for both the long put and the short call. However, if at expiration the market remains between the strike prices, the options expire worthless, resulting in no loss. If at expiration the market is at 245, as an example, then I have a $10 loss on the call side and my long put position expires worthless.
Chances are, I would roll my position prior to expiration to avoid assignment risk, locking in a loss and to manage the hedge more effectively. Be aware that assignment risk increases when nearing ex-dividend date, so you need to roll the short call more aggressively, especially if the call is ITM.
Rolling the Position
Rolling a position involves closing the current option contract(s) and opening new ones with a later expiration date and possibly different strike prices. The key considerations for rolling a collar position include:
Timing: Roll the position approximately 1-2 weeks before expiration. This avoids the rapid theta decay in the last week and minimizes the risk of assignment, especially for ITM short calls.
Strike Prices:
When selecting strike prices, I consider the expected move, which can be seen on the option chain of the particular expiration month you are selecting. For example, if the current market price is 222 and the expected move is ±$10, I would select strike prices close to 212 for puts and 232 for calls. Keep in mind that the expected move is usually overestimated by up to 25%. So, if the expected move is $10, I discount that by 20% to $8. Hence, my strike prices would be 214 for puts and 230 for calls. Note that it does not have to be perfectly symmetrical, so you can do 214 and 232, or whatever gives you a zero-cost hedge.
Expiration Dates: Choose a new expiration date approximately 45-60 days out. This strikes a balance between minimizing theta decay and keeping the hedge active for a reasonable period.
Cost Management: Aim to maintain a zero-cost hedge or incur only a small net debit. This can be achieved by adjusting the strike prices of the new call and put positions to offset each other.
Market Outlook: Consider the overall market conditions when rolling. If volatility is high, you may benefit from higher premiums on the short call, making it easier to structure a cost-effective roll.
Adjustments for ITM Calls: If the short call is deeply ITM, roll to a further-out strike (e.g., from 235 to 245) to reduce assignment risk. Be aware that this may require buying back the ITM call at a higher cost.
By proactively rolling the position, you can extend the hedge’s duration, adapt to changing market conditions, and manage assignment risks effectively.
Final Thoughts:
- Insurance Deductible: When initiating a position, think of the distance between the current market value (222) and the long put (210) as your “insurance deductible” (12 points in this example).
- Optimal Days to Expiration (DTE): The ideal DTE for this strategy is approximately 60 days.
- Research and Verify: Use tools like ChatGPT to find answers to questions, but always verify the information. For instance, try asking: “Collar strategy for portfolio hedging—what’s the sweet spot for selecting DTE?”
- Start Small: If you’re new to options, begin with one contract to gain experience. If you’re an experienced options trader, consider starting with a small number of contracts and gradually adding positions weekly. This approach provides diversification across strike prices and time horizons.
By keeping these principles in mind, you can effectively use a collar strategy to hedge your portfolio and manage risk.
Disclaimer: I only did a couple of trades using the Collar strategy, so I'm not a subject matter expert.
1) Implied volatility (IV) has a big effect on option prices!
2) Scenario #3 happens frequently because the market has an upward bias. When that happens your options P/L can look a little scary, but hopefully that's temporary and by expiration the market price will be between your strike prices, or you just roll it. That's why it's important to start small!
I'm perplexed by why BDRY keeps falling while consumer spending is up and the economy is doing well. After some digging here are some explanations:
1. A substantial drop in dry bulk shipping rates. As of December 11, 2024, it fell to 1,106 points, marking its lowest level since September 2023. This decline reflects reduced demand for shipping capacity and lower freight rates.
2. Oversupply of Shipping Capacity: Fleet Expansion: In 2023, approximately 32 million deadweight tons (DWT) of new dry bulk vessel capacity were delivered, with an additional 30 million DWT expected in 2024. This increase in supply has outpaced demand, leading to heightened competition among shipowners and driving freight rates down.
3. Geopolitical and Operational Challenges: Rerouting due to Red Sea Instability: Attacks by Houthi rebels in the Red Sea have forced vessels to take longer routes around the Cape of Good Hope, extending voyage times and disrupting schedules. While this has temporarily increased demand for shipping capacity, the associated operational challenges have contributed to market volatility.
4. Commodity Demand Fluctuations: Iron Ore and Coal Shipments: Projections indicate that iron ore shipments will grow by 3.0% from 2023 to 2025, while coal shipments could decline by 4.0% by 2025. These shifts in commodity demand directly impact the volume of goods transported by dry bulk carriers, influencing freight rates.
5. Economic Growth Projections: Forecasts suggest that global GDP could grow by 2.9% in 2024 and 3.2% in 2025, below the average annual growth rate of 3.7% observed between 2010 and 2019. Slower economic growth can lead to reduced demand for raw materials, affecting the dry bulk shipping industry.
So, while consumer spending and certain economic indicators remain strong, the dry bulk shipping sector faces specific challenges, including declining freight rates, fleet overcapacity, geopolitical disruptions, and fluctuating commodity demands. These factors have collectively contributed to the recent underperformance of BDRY.
thank you for this, Bill. It saved me a lot of time on research. Baltic Dry as an indicator has a lot of false negatives -- one would be under-invested if one followed it exclusively. Happily, I haven't noticed so many false positives. We'll see how this transports in 2025.
A happy and prosperous new year to you and yours, Bill!
Thanks for another excellent article, Martin. I especially liked “keep your knees flexed, your ear on the record player, and your behind near a chair.”
Two indicators I use that have me concerned are ‘NYSE Percent of stocks above 200 day moving average’ and ‘NYSE Advance-Decline issues’. They are both below the line I use for evaluating. Guten Rutsch to you too!
You might consider portfolio hedging with a Collar option strategy. You sell a call above current price and buy a put below current price with the same expiration. Of course you are long a portfolio of stocks/ETF’s. Try to match the premium you collect from selling the call to that for buying the put (not too hard to do). I use the expected move to determine my strikes.
Yesterday I put on the following IWM hedge at zero cost (actually 0.01 credit)! Expiration: 2/21/2025 Short 235 call, $2.86 credit. Long 210 put, $2.85.
tremendous, thank you Bill!
To be honest, I have never seriously concerned myself with options, so this is something I'll put on my 2025 resolutions list.
Why did you hedge IWM as opposed to SPY or QQQ? Is is because IWM advancing would be a serious indication of the bull market continuing into its next phase? On the other hand, how would IWM be significant if it dropped from here?
Hi Martin, I did not indend on writing a full blown article, but it ended up being one!
I have a sizable position in mid-cap stocks, which is why I hedged using IWM. Hedging with SPY or QQQ works similarly. When I placed the hedge, IWM was approximately at 222. If the market drops below that point, my long put gains value, while my short call loses value. Both outcomes are favorable from an options standpoint. However, the value of my mid-cap stocks (using IWM as a proxy) also decreases. This means that while my options position does well, my stocks are losing value, effectively offsetting each other—hence the hedge.
It’s important to understand the concept of “Delta.” Delta measures how much an option’s price changes relative to a $1.00 move in the underlying asset. For example, if IWM falls by $1.00 and the option has a delta of 0.30, the option’s price will change by $0.30. This is referred to as a 30-delta position. As the price moves closer to the strike price, delta increases up to approximately ±50. Conversely, as the price moves further away from the strike, delta decreases. On expiration day, delta approaches ±1.00 for in-the-money (ITM) options.
Currently, my position is as follows: long a bunch of mid cap stocks, long puts at 210 and short calls at 235. Here are some scenarios to consider:
Scenario #1: Market Falls Below 210
If the market price drops to 200 at expiration, my losses are capped at 210 due to the protective put. In this case, I make $10 per contract on the long put, which helps offset the decline in my stock holdings. Additionally, the value of the short call drops to zero, resulting in a 100% profit on the short call.
Scenario #2: Market Remains Between 210 and 235
If IWM remains range-bound between 210 and 235, both options expire worthless. In this scenario, I incur no loss, as this was a zero-cost hedge.
Scenario #3: Market Moves Above 222
If prior to expiration IWM moves above 222 (the price when the position was initiated), the short call at 235 begins to lose value because the market is moving closer to the call’s strike price, increasing the likelihood of assignment. Simultaneously, the value of the long put at 210 decreases because the market is moving further away from the put’s strike price, reducing the probability of the put being ITM. This creates a double "temporary" loss for both the long put and the short call. However, if at expiration the market remains between the strike prices, the options expire worthless, resulting in no loss. If at expiration the market is at 245, as an example, then I have a $10 loss on the call side and my long put position expires worthless.
Chances are, I would roll my position prior to expiration to avoid assignment risk, locking in a loss and to manage the hedge more effectively. Be aware that assignment risk increases when nearing ex-dividend date, so you need to roll the short call more aggressively, especially if the call is ITM.
Rolling the Position
Rolling a position involves closing the current option contract(s) and opening new ones with a later expiration date and possibly different strike prices. The key considerations for rolling a collar position include:
Timing: Roll the position approximately 1-2 weeks before expiration. This avoids the rapid theta decay in the last week and minimizes the risk of assignment, especially for ITM short calls.
Strike Prices:
When selecting strike prices, I consider the expected move, which can be seen on the option chain of the particular expiration month you are selecting. For example, if the current market price is 222 and the expected move is ±$10, I would select strike prices close to 212 for puts and 232 for calls. Keep in mind that the expected move is usually overestimated by up to 25%. So, if the expected move is $10, I discount that by 20% to $8. Hence, my strike prices would be 214 for puts and 230 for calls. Note that it does not have to be perfectly symmetrical, so you can do 214 and 232, or whatever gives you a zero-cost hedge.
Expiration Dates: Choose a new expiration date approximately 45-60 days out. This strikes a balance between minimizing theta decay and keeping the hedge active for a reasonable period.
Cost Management: Aim to maintain a zero-cost hedge or incur only a small net debit. This can be achieved by adjusting the strike prices of the new call and put positions to offset each other.
Market Outlook: Consider the overall market conditions when rolling. If volatility is high, you may benefit from higher premiums on the short call, making it easier to structure a cost-effective roll.
Adjustments for ITM Calls: If the short call is deeply ITM, roll to a further-out strike (e.g., from 235 to 245) to reduce assignment risk. Be aware that this may require buying back the ITM call at a higher cost.
By proactively rolling the position, you can extend the hedge’s duration, adapt to changing market conditions, and manage assignment risks effectively.
Final Thoughts:
- Insurance Deductible: When initiating a position, think of the distance between the current market value (222) and the long put (210) as your “insurance deductible” (12 points in this example).
- Optimal Days to Expiration (DTE): The ideal DTE for this strategy is approximately 60 days.
- Research and Verify: Use tools like ChatGPT to find answers to questions, but always verify the information. For instance, try asking: “Collar strategy for portfolio hedging—what’s the sweet spot for selecting DTE?”
- Start Small: If you’re new to options, begin with one contract to gain experience. If you’re an experienced options trader, consider starting with a small number of contracts and gradually adding positions weekly. This approach provides diversification across strike prices and time horizons.
By keeping these principles in mind, you can effectively use a collar strategy to hedge your portfolio and manage risk.
Disclaimer: I only did a couple of trades using the Collar strategy, so I'm not a subject matter expert.
Two other things to consider:
1) Implied volatility (IV) has a big effect on option prices!
2) Scenario #3 happens frequently because the market has an upward bias. When that happens your options P/L can look a little scary, but hopefully that's temporary and by expiration the market price will be between your strike prices, or you just roll it. That's why it's important to start small!