With this column, I would like to share some thoughts on advanced bond trading. If you’re not ready for this, you should read up on the HSX basics with HSB&R’s Strategy Guide or on bond rules with Ultimate Frisbee’s Bonds 101.

When that is done, you are probably already playing bonds and making money on the bond adjusts every week. This is all fine and I am sure that you are already making most of the bond money there is to be made. Still, you may be able to pick up a trick or two in the discussions below or be inspired to think more about what you have been doing for a long time.

First, let’s discuss two questions that are brought up again and again on Ticker Talk. Do I go for maximum gain or maximum ROI? And when is the right time to invest in a bond?

The first question is simple to answer: If you have H$100 to invest how do you get the best return? Let’s say that there are three bonds adjusting tomorrow: One is priced at H$100 and will adjust to H$108 (8% ROI), the other two are priced at H$50 and will adjust to H$55 (10% ROI). If you are sorting them by maximum gain, you will invest in the expensive bond and have H$108 tomorrow. If you sort by ROI you will invest in the two cheaper bonds and have H$110 tomorrow. Some will argue that for bigger ports it’s easier to take the big gains; I will say that it’s worth trading a few more bonds for a bigger gain.

When to invest is much more complex to answer. There are no simple rules and even when you know what to look for, there will be bonds moving fast the right way surprisingly long before adjust and others moving the wrong way surprisingly late. It’s still an important question though: No matter how good the ROI is according to the bond charts, it’s only theoretical ROI. A bond is still a bad investment if it moves the opposite way of how it’s “supposed to”, so basically you don’t want to invest before the moment before it starts moving the expected way. The problem is that this isn’t a matter of simple math but a matter of player psychology. Here are a few observations on how to predict the right time to invest:

• -> Bonds generally have a quite short horizon – most players can only afford to invest in bonds a few months away, which means that the bond price will not move towards the adjust price until two or three months before.
• -> Bonds adjusting for high profile movies will move earlier. This is probably due to some players not using the bond charts, and just checking bonds from the movies they know. Some people may even just buy the bonds of the high profile movies, making all the bonds move up, regardless of whether the expected adjust is up or down.
• -> This also leads to the rare case of a good short that keeps going up in price because of a high profile movie further out. An example is Cate Blanchett, whose bond was expected to adjust down for Heaven but kept going up because people bought it for The Two Towers. In this case you’ll want to wait until fairly late to short the bond.
• -> A related case is expensive bonds with big adjusts. It may not be spectacular on the ROI radar, but some people will see the big dollar gain and invest in it for the reasons I mentioned above. If you have a really, really big port you may want to ride some of these slow movers which are still better than the interest on cash.
• -> In the opposite end, cheap bonds may move quite late as the dollar gain will be small compared to the ROI. Be especially careful with cheap bonds adjusting down. A bond priced at H$3 and adjusting to H$1 in one month has a decent ROI of 0.85%, but it usually doesn’t creep down in a linear way – the best bet is that it will stay around H$3 until very close to the adjust.
• -> Limited releases are, of course, released three months before the attached bonds will adjust, but don’t expect that this will make the bonds move earlier. Although the delist price can be estimated with more certainty it appears as if the limited-release-film-related bonds get overlooked anyway. Most traders probably overlook these bonds in spite of the relative certainty of the returns.

After taking all this into consideration you have to decide whether you prefer a bond with low theoretical ROI but close to adjust or one a little further out but with higher theoretical ROI. Also, remember that if you take your time some weekends to re-short during the commission free period, a bond held short can make you more than the theoretical ROI. The gains that you pull out of it can be reinvested to make you more profit.

Now you have an idea of when to get into an upcoming adjust, and it’s time to fine-tune your playing. If you know how to play the movie stocks, you know that it’s important to follow the news and react early. The same is true for bonds, but not the same kind of news. The casting news that will make a movie stock shoot up, doesn’t seem to have any effect on the involved bonds. The news to look out for is when uncertain cases are solved. Sometimes it’s impossible to decide whether Actor X is in Movie A until the press kit comes out, and when the decision is posted on the Bond Board it’s time react fast and either get the bond or get rid of it.

Another thing to look out for, and react fast on, is when a new release surprise the traders. If it opens much better or much worse than expected, it will also influence the adjust of the related bonds. So, when you get over the Saturday morning shock of surprising Friday numbers, it’s time to recalculate the bond adjust. Here at HSB&R you can pull up the chart of the current weeks openers and change the expected cash-out prices to your estimates to see if it changes anything. Sometimes it will just make a good investment better, other times you’ll see that an expected short turns into a buy and a buy into a short.

One thing is to make the most that you can out of the bond adjusts, but how about also making money after the adjust? First of all, you should always carefully check the next adjust of all the bonds adjusting. If the bond adjusting to H$50 today is adjusting down to H$10 in two weeks, you don’t want to miss it.

This is not the only way to make money post-adjust. You can also make money on slow traders – on the day of the adjust the price of adjusting bonds is frozen, but people getting out of the investment the following day(s) will drive the price the opposite way of the adjust. You can take advantage of this by shorting the bonds you had long (and vice versa) in the cases when you expect the move to be significant enough to be worth it. The challenge here is to guess which bonds are worth it. You have to guess whether enough players will trade it on Wednesday to change the price a lot.

A quick rule of thumb is that if you own the bond for a good reason, then there’s a good chance many others also do – especially if it has been a good investment in your port for some time, meaning that the long-term players also have it. But a more scientific way to do it is to check the volume held of the various bonds. In the market lab you can graph the “Shares Held” for every bond and stock on the exchange, and then you just have to decide which total volume you will use as your limit for investing. Experiment for a few weeks and learn through experience, before throwing all of your money in this. When you have invested in what you believe are the right bonds, keep an eye on them. Sometimes they turn around Thursday, sometimes Friday,  and sometimes you can keep them until Saturday morning and trade them without commission.

I would like to thank my Bonds Fund partner BrokerGreg for a great partnership that has been a lot of fun and a great two-way learning experience and which has developed and refined the ideas in this column.

Bickle Jr.