Patrick Boyle

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Two chip stocks recently drove seventeen percent of the entire global stock market's return in a single month — which tells you just how concentrated the AI trade has become, and how exposed the average investor now is without realising it. In this video we look at how much wealth an AI crash could actually destroy, with estimates from Dean Baker, former IMF chief economist Gita Gopinath, and Oliver Wyman running into the tens of trillions of dollars. We cover why the usual places to hide — small caps, value funds, international stocks — are now packed with AI stocks, what the Bank for International Settlements found when it compared today's buildout to the great railway and dot-com bubbles, and why a technology being real has never been enough to protect the people who overpaid for it. This isn't a crash prediction. It's a look at the downside risk, the illusion of diversification, and why boring, unexciting investing tends to win in the end.

Patrick's Books:
Statistics For The Trading Floor: https://amzn.to/3eerLA0
Derivatives For The Trading Floor: https://amzn.to/3cjsyPF
Corporate Finance: https://amzn.to/3fn3rvC

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Patrick Boyle On Finance Podcast:
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Will The US Oil Fund Be Shut Down By Their Broker?
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The situation with USO, the US Oil ETF just gets weirder and weirder. In todays video we will discuss whether USO will have to liquidate their holdings after running into issues with their brokers.

The situation with USO, the US Oil ETF just gets weirder and weirder. In todays video we will discuss whether USO will have to liquidate their holdings after running into issues with their brokers.

Some history on this topic.

Oil prices went negative for a few hours the day before the expiration of the may oil futures contract last April. I posted a video explaining that issue. Here is the link https://www.youtube.com/watch?v=dfqmjSOD7pQ
The USO is an ETF that invests in oil futures. They had rolled their futures, so were uninvolved with the negative price issue, but…

People realized the USO could possibly go negative and there were no systems in place to deal with an ETF having a negative price, in addition the fund AUM ballooned and USO no longer had sufficient authorized shares allowing its price to drift from NAV. I made a video on that topic too. https://www.youtube.com/watch?v=BIqIjbHeV-g

The make up of the ETF was then changed, so it was then tracking longer dated contracts, minimizing the impact of the roll and reducing the risk that the ETF could have a negative NAV.

This is not great for hedgers, many of whom short the ETF to hedge a position and need it to accurately track its underlying.

In today’s news we are now learning that brokers (known as FCM’s in the world of futures trading) might now be unwilling to deal with the USO ETF for risk management reasons.
RBC Capital is the USO ETF’s only clearing broker and RBC has informed the ETF that they are longer prepared to clear USO’s portfolio. Specifically, in the benchmark front month but also, rather surprisingly, in any other expirations. RBC has indicated that this limitation on USO is a result of RBC’s own internal risk management requirements and directions it has received from other regulators in the United States, Canada and the United Kingdom. Ugh… Brokers.

USO just filed an update to the SEC today explaining:
RBC, currently USO’s only FCM, has expressly informed USO that, until further notice, USO may not hold positions in the Benchmark Futures Oil Futures Contract and that it may not purchase any other Oil Futures Contracts for USO’s portfolio through RBC whether or not such purchases would be within the limits permitted by the exchanges.

RBC and other market participants , including other FCMs, have taken risk mitigation measures that constrain USO’s ability to invest in the Benchmark Futures Contract and other Oil Futures Contracts.

USO has been engaging in efforts to enter into additional FCM agreements for the purpose of the purchase and sale of Benchmark Oil Futures Contracts as well as other Oil Futures Contracts.

To date, USO has not entered into an agreement with any FCM other than RBC and it cannot predict with any certainty when it will do so.

Some more History:
USO’s sister product, the United States Natural Gas Fund (UNG), experienced similar, but lesser stresses in the Summer of 2009.
First its AUM exploded, then it started experimenting with exotic instruments, next its registered shares got depleted, then its creations were suspended, then it continued to trade at a premium despite creations being suspended, then the SEC failed to grant it permission for the issuance of new shares. So far this is the same as the USO. For UNG, the SEC ended up changing its mind after regulators got involved with position limits, and finally, the fund reopened.

This situation is differ

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Happy FlexiSpot Brand Day & Memorial Day Sale, up to 65% OFF —on May 26th at 9:00 AM, the first 20 customers to place an order will have a chance to get it 100% free. If you are on a budget, FlexiSpot premium E7 will be a great option. Shop now and if you liked it, leave a note saying “Patrick Boyle” at checkout and use my code ''YTE7P50'' to get EXTRA $50 off on the E7 Plus/E7 Pro/E7L standing desk or "YTE730" to get EXTRA $30 off on the E7 standing desk!

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Developed economies around the world have been growing their debts over the last twenty-five years. This was less of a problem when interest rates were close to zero but in the era of trade wars, lower credit ratings and higher interest rates, debt is more expensive to issue and service. Bond investors have worried that governments are addicted to debt for quite some time, and recent drama in the Japanese bond market along with the deficit spending of Trump's "one big beautiful bill" lead many to question the ability of governments to cover massive budget deficits. This video looks at the drivers of growing government debt, what the money is spent on, can Elon Musk's DOGE cut spending and analyze the role of the 'bond vigilantes', to understand if huge budget deficits and government borrowing could spiral out of control.

Patrick's Books:
Statistics For The Trading Floor: https://amzn.to/3eerLA0
Derivatives For The Trading Floor: https://amzn.to/3cjsyPF
Corporate Finance: https://amzn.to/3fn3rvC

Ways To Support The Channel
Patreon: https://www.patreon.com/PatrickBoyleOnFinance
Buy Me a Coffee: https://www.buymeacoffee.com/patrickboyle

Visit our website: https://www.onfinance.org
Follow Patrick on Twitter Here: https://bsky.app/profile/pboyle.bsky.social

Business Inquiries ➡️ [email protected]

Patrick Boyle On Finance Podcast:
Spotify: https://open.spotify.com/show/7uhrWlDvxzy9hLoW0EYf0b
Apple: https://podcasts.apple.com/us/podcast/patrick-boyle-on-finance/id1547740313
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Use PATRICK activation code at http://nordpass.com/patrick to get a NordPass Business 3-month free trial. No credit card is required.

This Monday was one of the worst days for global stock markets in years, Stocks in the US, Europe and Japan tanked on Friday and again on Monday before a partial rebound. Bond yields and foreign exchange rates swung around wildly too.

The Magnificent seven stocks lost about $1 trillion dollars in value in just two days. So, what exactly is going on in markets, and how much should we worry?

Patrick's Books:
Statistics For The Trading Floor: https://amzn.to/3eerLA0
Derivatives For The Trading Floor: https://amzn.to/3cjsyPF
Corporate Finance: https://amzn.to/3fn3rvC

Ways To Support The Channel
Patreon: https://www.patreon.com/PatrickBoyleOnFinance
Buy Me a Coffee: https://www.buymeacoffee.com/patrickboyle

Visit our website: https://www.onfinance.org
Follow Patrick on Twitter Here: https://twitter.com/PatrickEBoyle

Business Inquiries ➡️ [email protected]

Patrick Boyle On Finance Podcast:
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Apple: https://podcasts.apple.com/us/podcast/patrick-boyle-on-finance/id1547740313
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What is Futures Margin? - What Is It? How Does It Work?

These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. https://amzn.to/2WIoAL0
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Margin is a critical concept for those trading futures and derivatives in all asset classes. Futures margin is a good-faith deposit or an amount of capital one needs to post or deposit to control a futures contract. The margin is a down payment on the full contract value of a futures contract.

Futures exchanges determine and set futures margin rates. At times, brokerage companies will add an extra premium to the minimum exchange margin rate to lower risk exposure. The margin is set based on the risk of market volatility. When market volatility moves higher in a futures market margin rates rise. When trading stocks, there is a simpler margin arrangement than in the futures market. The equity market allows participants to trade on up to 50% margin. Therefore, one can buy or sell up to $100,000 worth of stock for $50,000.

Margin Rate for Future Contracts
In the world of futures contracts, the margin rate is much lower. In a typical futures contract, the margin rate varies between 5 and 15% of the total contract value.

Initial Futures Margin is the amount of money that is required to open a buy or sell position on a futures contract.

Initial margin is original margin, the amount posted when the original trade takes place.

Margin Maintenance or Variation Margin
Margin Maintenance is the amount of money necessary when a loss on a futures position requires one to allocate more funds to return the margin to the initial or original margin level. Closing or liquidating a position eliminates the margin call requirement.

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Passive investment indexes in times of market volatility have become a subplot of the recent drama in markets, following wild moves in the oil market. It’s looking like things could kick off in stocks, too, as index overseers consider ejecting underperforming companies.
In indexes like the S&P 500, dozens of companies are at risk of deletion, after shares dove in March. While index compilers are guided by rules, they must also use their judgment in assessing the market right now: how much of the recent plunge will turn out to be permanent?
The S&P committee is going to have to decide how long to wait before ejecting impaired companies, The S&P 500 may be the world’s most-followed passive index, but the recent market volatility is going to force its constructors into some very active choices.
More than 30 firms might be removed from the S&P 500.

The S&P500 has staged a remarkable recovery since March, a rebound whose strength is largely due to its weighting in technology and health-care stocks. Less noticed by investors is the impact of almost fifty company removals over the last three years. These deletions were mostly of retail, industrial and energy companies, sectors that have happened to struggle the most in 2020.
A basket of the companies deleted from the S&P 500 over the past three years (for reasons other than acquisitions) is down 47% this year, almost five times more than the broad markets 2020 decline. Just five of the deleted firms have shown positive returns year to date. Bed Bath & Beyond and Macy’s, two large retailers are down around 70%.

Many of these companies were in some form of trouble before 2020, justifying their removal. But the fact that they belong to the industries that have struggled the most this year has been fortunate for anyone with passive index exposure to the market.

Changes in index members are made as needed and can be made at any time, according to S&P Dow Jones Indices. Human judgment is part of the process, the committee aims to minimize turnover and doesn’t view crossing below thresholds governing, market capitalization, as a reason alone to eject a stock.

The criteria for addition to an index are not the same as those for continued membership according to the S&P U.S. Indices Methodology rule book available on the Standard & Poors website. “An index constituent that appears to violate criteria for addition to that index is not necessarily going to be deleted unless its impairment is judged to be more permanent.

Removal of 30 companies would exceed the annual average over the last thirty years and be one of the busiest years on record. Even passive investments have active elements, a fact on display last month when an oil ETF reshuffled the mix of its futures in order to protect itself from blowing up.
A company must have a market-cap of at least $8.2 billion for S&P 500 consideration. Liquidity must also be sufficient, and the sum of total earnings over the past four quarters must be positive, along with profits in the most recent quarter.

Market-cap guidelines for the S&P500 were raised to $8.2 billion on Feb. 20, 2019, about a fifth of companies in the index no longer meet that standard today.

The index committee is probably hesitant to add more technology firms to a benchmark that’s already very concentrated in that sector. The Information Technology sector makes up 26% of the index, the highest share since the dot-com boom.

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Passive investing, index adds and deletes, vanguard index fund.

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It seems like every day the tech industry comes out with a "brilliant new idea” that turns out to be merely a reinvention of a mundane product that already existed. Tech bros keep reinventing the bus, but they have also taken to reinventing the tea pot, the toothbrush, the lunchbreak and the public park. In today's video we look at the tech products that either already existed or should never have existed.

Patrick's Books:
Statistics For The Trading Floor: https://amzn.to/3eerLA0
Derivatives For The Trading Floor: https://amzn.to/3cjsyPF
Corporate Finance: https://amzn.to/3fn3rvC

Ways To Support The Channel
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Patrick Boyle On Finance Podcast:
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In todays video we will learn about some of the problems in Value at Risk.
These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. https://amzn.to/2WIoAL0
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In todays video we will learn about some problems with Value at Risk (VaR) Calculations.

One of the first issues with VaR is that there is no standard protocol for the statistics used to determine asset, portfolio or firm-wide risk. For example, statistics calculated using a period of low volatility may understate the potential for risk events to occur and the magnitude of those events. Risk may be further understated using normal distribution probabilities, which rarely account for extreme events.

The assessment of potential loss represents the lowest amount of risk in a range of outcomes. For example, a VaR determination of 95% with 20% asset risk represents an expectation of losing at least 20% one of every 20 days on average. In this calculation, a loss of 50% still validates the risk assessment.

The financial crisis of 2008 exposed these problems as the relatively benign VaR calculations ended up understating the risk posed by portfolios of subprime mortgages. Risk magnitude was also underestimated, which resulted in extreme leverage ratios within subprime portfolios. As a result, the underestimations left institutions unable to cover billions of dollars in losses as subprime mortgage values collapsed.


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What is Intrinsic value and Time Value of Financial Options?, In The Money, At The Money, Out Of The Money

These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. https://amzn.to/2WIoAL0
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The price of an option is made up of a combination of intrinsic value and time value.

The intrinsic value of an option is the value of exercising the option right now. If the price of the underlying stock is above a call option strike price, the option has a positive monetary value, and is referred to as being in-the-money. If the underlying stock is priced cheaper than the call option's strike price, the call option is referred to as being out-of-the-money. If an option is out-of-the-money at expiration, its holder simply allows the option to expire worthless. This is because a rational investor would choose to buy the underlying stock at market rather than exercise an out-of-the-money call option to buy the same stock at a higher-than-market price.

For the same reasons, a put option is in-the-money if it allows the purchase of the underlying at a market price below the strike price of the put option. A put option is out-of-the-money if the underlying's spot price is higher than the strike price.

The time value of an option is the premium a rational investor would pay over its current exercise value (intrinsic value), based on the probability it will increase in value before expiry.

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