Coytee Posted August 29, 2007 Share Posted August 29, 2007 But you can also reduce the odds significantly by 'betting' on a historically volatile stock where you simply want it to move - up or down - and choosing a reasonably 'achievable' strike price with a pocket-able outcome/profit that exceeds the option cost by straddling the stock. There are always exceptions to a given perspective. That said, a (traditional) straddle is buying (or selling) a call AND a put on the stock (both out of the money so the call is above the stock price and the put is below the strike price). This presumes you are buying and going long the position You are in fact hedging that the stock might not move up, but might move down. You are ALSO risking that the stock for the time period involved just MIGHT move sideways. You make the comment that the strike price might be reasonably achievable... that is going to mean the strikes are closer to the current price of the stock. If the stock is indeed a volitile stock then you can rest fairly assured that the closer the strike prices are, the MORE expensive they will be and the more the stock 'might' have to move, to overcome that higher price. Example: Intuitive Surgical (NASDAQ: ISRG) We will also presume ZERO trading costs/commissions very volitile stock, closed today at about 215.58, up 9.60 for the day If we look at some puts/calls and do a spread.... what? 15 dollars off the strike price and how's 30 days out? We'll go to October since September is upon us Oct 200 put and a Oct 230 call Oct 200 put traded for $10.00 today but showed a closing bid ask of 8.80 - 9.20 Oct 230 Call traded for 10.30 today, closing at 10.20 - 10.60 So do we use last trade price or current bid or current ask? Buying on the bid isn't for sure so we'll use the asking price You can buy the Oct 200 put for 9.20 and if we hold til the expiration day (because that's the only day we can ASSURE an "if this, then that" situation) the stock really has to be at 190.80 before your option is going to be worth 9.20. To the degree it exceeds 190.80 you will be making money on the put (and by the way, the call will be worthless) yes, if the stock dropped to 200 "tomorrow" (which for this one, is certainly possible) then your (bid price) 8.80 option will most likely be worth more...how much more? depends on where stock might be. On the call side, you buy it for 10.60 and now the stock (on expiration day) must be OVER $240 before you're really making any money because you will have lost all your time premium between here & then. There are two components to value an option, "time value" and "intrinsic value" (not to be confused with specular distrubutions!!!) You are ALWAYS losing time value so you can (IMHO) view time value as sort of a downward escalator that you are trying to walk up. If you do not walk up faster than it's moving down (via the option moving in your preferred direction) then the time value will drive you to zero. This is starting to get long... tis one reason I don't talk much on these topics because I want to be accurate and that ends up necessating novels... Suffice it to say that if you buy close in "near the money" options, you are going to pay MORE for them and if the stock stays stagnent you will need it to fall/rise more on expiration day to allow you to make money (or salvage your bet) I think if you simply look at it in the eyes of how Vegas works you will find that Vegas (on the casino floor) does not employ too many straddles, combos or anything else... you pretty much lay your bet and roll the dice/cards/wheel. Same with options... if you break each of the strategies down, you are STILL dealing with specific issues and I'd suggest that each one has its own risk element that can be viewed as I suggested above. Yes you CAN hedge options and so on... but now you're getting a bit more sophisticated with debit or credit spreads but again, the underlying reality is there... If you do a straight up option purchase (put or call) you can then make "a million" or what ever... point being you can hit a home run BUT your entire amount "bet" on the option is at risk. If you hedge and do a spread of some form or another... you are perhaps hedging your risk but you are also by definition, diluting your possible earnings much like buying insurance on blackjack in Vegas... all you "win" I think is your bet back?? (I might add I'm not a blackjack person so I'm going on BAD memory) As a flip flop?? lol... I'm not against buying IN the money options as then at least you can presume to get 1:1 movement in the near term (and perhaps that was part of what you were thinking) Ultimately, if you look at option trading, I suggest you try to model your trading after a money making model. you do NOT see Vegas giving YOU their money to place the bet.... THEY are the house and structure the bets so they are of course, favorable to the HOUSE as often as possible. I contend that you can structure option trading in a similar way in that you can figure out what stock you might want to buy, sell an out of the money put on it and if it expires worthless, you keep the cash. If you ARE assigned, you just bought the very stock you WANTED to buy at a better price. Take ISRG again... instead of buying the spread, you simply SELL the put and deposit $8,800 (8.80 x 10 contracts (1000 shares)) NOW you have the OBLIGATION to purchase the stock at 200 and the stock is currently trading at 215 so... if the stock drops to 201, they are NOT typically going to make you buy it from them at 200 when they can sell to the market at 201 so you end up keeping the cash. If on the other hand, the stock is anywhere ABOVE 191.20 then you are STILL making money... because you paid 200 for the stock BUT they already gave you the 8.80/share so your net cost is really 191.20. If the stock closes at 198 & they make you buy it for 200, I personally would be doing backflips and simply sell a call agaisnt the position. If on the other hand, the stock is at $150... well... let's be dramatic... what if the stock is Enron and it's at ZERO. Well, yes that really sucks BUT...would you rather buy the stock for 215 and it go to zero OR do the above and only pay 191.20 and it go to zero??? I hope we can agree that though it IS possible that a stock is zero on expiration day that this isn't really likely to happen in the "real world". It's just a dramatic exaggeration to simply show the logic. I feel like MAS Jr!!! [6] Quote Link to comment Share on other sites More sharing options...
pauln Posted August 30, 2007 Share Posted August 30, 2007 Coytee, Don't really understand what you've written. The reports say mystery trader is gambling 1 billion dollars that the Euro market thing is going to dive to 1/3 of its value. I don't know what else to think except that this trader either knows something about a coming fall or is in a position to cause the fall itself. Who could this trader be? Quote Link to comment Share on other sites More sharing options...
mas Posted August 30, 2007 Share Posted August 30, 2007 Thanks Richard! Pauln: It sounds like someone playing the Forex market. Quote Link to comment Share on other sites More sharing options...
colterphoto1 Posted August 30, 2007 Share Posted August 30, 2007 the only person getting rich on my money is my broker what is going wrong here? Quote Link to comment Share on other sites More sharing options...
Coytee Posted August 30, 2007 Share Posted August 30, 2007 Don't really understand what you've written. All I was trying to do was explain that in my opinon, for your average "Joe Investor" that to buy options is an exercise in gambling utilizing more pot luck to make anything where as if you really want to try to "MAKE" anything in option trading that you are (again, IMHO) better off not buying them but selling them. By doing so you will never hit a 'home run' and make a zillion dollars (like Vegas won't make a million on every person going out there to gamble) however you CAN nickle & dime yourself some cash into your account and over time make some decent change (just like Vegas) Lemme put it this way... my partner at work (who made a killing selling his prior company) has a large account and is buying stocks and selling options. Last year he made something near $50,000 by only selling calls/puts. could he have made that by purchasing an option? Possibly... he also could have possibly made more than that on a single trade had he been lucky & bought the right item. As it were... he's actually been "MAKING" money on options now for about 7 years. He's not taking down a zillion dollars and he's not hitting home runs.... Just thoughtful trades and hitting singles/doubles most times he's at bat. The reports say mystery trader is gambling 1 billion dollars that the Euro market thing is going to dive to 1/3 of its value. I don't know what else to think except that this trader either knows something about a coming fall or is in a position to cause the fall itself. Who could this trader be? No clue on who it might be but if all that is accurate, they are clearly making a huge bet and if you think about what I said above on the 50/50 odds of each component being correct as being optimistic, you might infer that they got some HUGE cahones for rolling those dice or perhaps, they indeed might be in the know of something? Quote Link to comment Share on other sites More sharing options...
Coytee Posted August 30, 2007 Share Posted August 30, 2007 the only person getting rich on my money is my broker what is going wrong here? Clearly, you need to call someone who works for free!!! now...where's Roger... [:$] Quote Link to comment Share on other sites More sharing options...
mas Posted August 30, 2007 Share Posted August 30, 2007 the only person getting rich on my money is my broker what is going wrong here? Wrong? From whose perspective?! [] It would be interesting if brokers worked for a percentage of the realized profit...and I suspect radically different! Quote Link to comment Share on other sites More sharing options...
Coytee Posted August 30, 2007 Share Posted August 30, 2007 It would be interesting if brokers worked for a percentage of the realized profit...and I suspect radically different! Interesting... I'm curious how would that work? If you were "profitable" on a buy/hold position... would we get paid quarterly/annually on the unrealized profit? What if you didn't sell and it went back down...would we have to reimburse for the lost profit? Would we only get paid upon closing the transaction & calculating the profit at that point in time? hmm... (wouldn't THAT be a REAL enticement for churning?) Heck...I've got some accounts who have held the same stock (and mutual fund) positions for 10-12 years now... I'd sure hate to get a percentage of the profits upon the sell of these positions since it doesn't look like we ever going to liquidate!! I'm starting to catch up with OldBuckster... ahh..yet another thought... what if the trade is UNprofitable??? do we share in the losses? (illegal by the way) One thing I've always held in the back of my mind... I don't mind the fees I charge on a purchase of a stock (actually, it's usually 'reasonable') BUT...upon the selling of the stock, I have a number that since this is a public arena, I'll keep quiet on but if I do not meet that percent return for the person then on the sell side, I don't feel I've "earned" my commissions and I'll cut the sell side to the bone. If on the other hand, I HAVE met that number, then I don't mind 'paying myself' when we sell..after all, if that happens, I feel as though I've earned it. Of course, this doesn't apply to mutual fund transactions. Quote Link to comment Share on other sites More sharing options...
Coytee Posted August 30, 2007 Share Posted August 30, 2007 Ohhhhhhhhh... MAS...here's another thought.. based on a true story... This goes back to just prior to the "tech bubble" happening... I had an account, I suggested she buy 1,000 shares of E*trade. My memory is vague here because this was 1998 or perhaps 1999 I could look up the historical prices to be exact but the exact prices won't change the essence of the story which is below. She bought it for say, $20/ share as I reflect (possibly in error) I might add that this was in a 401K account so we had no concerns for taxes. As it happened...within about six months, the stock was at 80/share. I mean this was not a good trade, it was a home run. As I was watching it... all the sudden, my years of experience came in and I recognized that it SEEMED to have hit a ceiling and I feared it was going to pull back. I called her on the phone, stock about $80/share... all the sudden, SHE became the expert and was getting greedy, not wanting to sell. Fine by me. Well, as it were, the stock DID pull back and if I had to try to remember using my faulty brain cells, within maybe 3 months, I think it was back UNDER $40/share and she essentially pissed 40,000 away. So, if a broker were to get paid on the capital gains, what happens here? Do I get paid on the $80 price since as it turned out, I called it right and she didn't sell? Do I get paid based on the $40 price? how is that fair to ME that she didn't listen?? Clearly, she STILL did a nice trade going from under 20 to 40 but unfortunately, that wasn't how I looked at it. She COULD have had the 80 and then rebought her 1000 shares (presuming she still wanted the stock after it fell 50%) when it dropped back to 40 and STILL had $40,000 cash laying around for another 'seed'. Quote Link to comment Share on other sites More sharing options...
Coytee Posted September 4, 2007 Share Posted September 4, 2007 Example: Intuitive Surgical (NASDAQ: ISRG) We will also presume ZERO trading costs/commissions very volitile stock, closed today at about 215.58, up 9.60 for the day If we look at some puts/calls and do a spread.... what? 15 dollars off the strike price and how's 30 days out? We'll go to October since September is upon us Oct 200 put traded for $10.00 today but showed a closing bid ask of 8.80 - 9.20 So do we use last trade price or current bid or current ask? Buying on the bid isn't for sure so we'll use the asking price To help show what might have happened on selling a covered put as opposed to buying a spread, here's page 2 of the story (though it's not over until it's in fact over, so this is only an 'update' of sorts) Had someone sold the above put highlighted at $8.80 what's happening from that post to today? Stock is currently 226.19 (up $4.91) The Oct 200 put is now trading for 5.90 x 6.30 so what does that mean? Well, first remember the theory of "buy low and sell high" or put another way "sell high then buy low" We would have SOLD this put above for $8.80 and now if we bought it back at the market (on the ask at 6.30) we could do so and by doing that could lock in $2.50 gain on a "purchase" (even though the purchase was done after the sell) of 6.30. Now...if someone had done the above, I'd suggest to them that they maybe NOT cover their position yet since the stock is now at 226/share and our strike price is at 200. We're not at risk of actually buying the stock unless it goes to 200 or below so we actually have a $26 buffer until we're going to (most likely) have to buy the stock. Even if the stock dribbles down to 200/share, if it takes it until AFTER 10/19/2007 to do so, then we STILL get to keep the money. For us to be 'wrong' in this transaction, it has to fall below 200 prior to that date. But if someone did the above and was still a bit of a nervous nanny, they could cover the trade and "buy" for 6.30, that which they sold for 8.80 and lock in a 39% gain (exclusive of trading costs) from the above post to this post. By SELLING the option (ie, playing the part of the house like in Vegas) WE are holding onto the money and have to be proven wrong before we let it go. I would prefer to ALWAYS be the one in that position, rather than be the one to lay the money down to another and have to then prove THEM wrong. BTW, had we bought the spread we would have bought the put for $9.20 and could now sell it for 5.90 however we would have bought the Oct 230 calls too for 10.60 and today, sell them for 13.90 so...to net that all out Calls: 1,000 x 10.6 = 10,600 Sell for 1,000 x 13.90 = 13,900 for a net $3,300 gain Puts: Bought the puts 1,000 x 9.20 = 9,200 Sell for 1000 x 5.90 = 5,900 for a $3,300 LOSS I might add that to keep it simple I'm using "1000 shares" when in fact, options trade in contracts that are in lots of 100 so the above would be "10 contracts" btw, I would not have expected these numbers to work out to perfectly negate themselves. I would have anticipated a small difference. Quote Link to comment Share on other sites More sharing options...
johnyholiday Posted September 20, 2007 Author Share Posted September 20, 2007 Don't let this chart fool you at first..... unemployment is good, when unemployment is at 6% the average return is ~19% per year.....why because the Fed fights back with cheaper money when unemployment is rising....money is a tool and a interest rate is how much it costs to use that tool ~$~ all disclaimers apply ~$~ Quote Link to comment Share on other sites More sharing options...
johnyholiday Posted September 22, 2007 Author Share Posted September 22, 2007 B. B. Bernanke droped a LOVEBOMB on the market,moving average ribbons show volumes back ....~$~ all disclaimers apply ~$~ Quote Link to comment Share on other sites More sharing options...
johnyholiday Posted September 22, 2007 Author Share Posted September 22, 2007 Didn't even Redline the 409 this time ~$~all disclaimers apply ~$~ Quote Link to comment Share on other sites More sharing options...
johnyholiday Posted September 25, 2007 Author Share Posted September 25, 2007 [8][8][8] [8][8][8] [8][8][8] [8][8][8] [8][8][8] [8][8][8] [8][8][8] Quote Link to comment Share on other sites More sharing options...
johnyholiday Posted September 25, 2007 Author Share Posted September 25, 2007 Liquidity inflow levels are an important gauge as to whether or not the stock market is in a corrective mode or a rally mode Quote Link to comment Share on other sites More sharing options...
johnyholiday Posted October 8, 2007 Author Share Posted October 8, 2007 When you hear TV commentators or Wall Street strategists opine that the US is decoupling from international stocks.. don't think again - they're right ... but they - are wrong... given the US is very likely to outperform international stocks. This clearly will catch everyone offsides... which typically happens at major trading inflection points the foreign markets aren't outperforming the US large caps...this love affair with all things "international" is quite likely coming to a close... the ratio of the S&P 500 large caps (SPY) versus the Morgan Stanley EAFE Index (EFA), which tracks only international stocks given all the "hoopla" the ratio has formed a bullish wedge bottom, with prices trading right below their 60-week exponential moving average. If prices breakout above this level this event would serve as confirmation that a multi-year period of international under performance is ahead. ~$~ all disclaimers apply ~$~ Quote Link to comment Share on other sites More sharing options...
johnyholiday Posted October 8, 2007 Author Share Posted October 8, 2007 So the "Chinese Google" now has over a $10 billion market cap.... might as well go to the source right!! an enter "insane...." ~$~ all disclaimers apply ~$~ Quote Link to comment Share on other sites More sharing options...
johnyholiday Posted October 8, 2007 Author Share Posted October 8, 2007 Johnys picking on China again..... One market that isn't about to inch down is, of course[bs], the Chinese one. More remarkable still is that the freakin' thing was closed all last week! how's that for amazing performance? Chinese stocks can continue to blast higher, even while their markets are shuttered! Truly a miracle. Here's the latest on the Amex China index, with the stretched-to-the-limit Bollinger Bands ~$~ all disclaimers apply ~$~ Quote Link to comment Share on other sites More sharing options...
Guest srobak Posted October 10, 2007 Share Posted October 10, 2007 Quote Link to comment Share on other sites More sharing options...
johnyholiday Posted October 10, 2007 Author Share Posted October 10, 2007 .....JUST SETTING UP SOME MONITORS...... spruce up the CHARTROOM....[bs]~psychic~[bs]... Chicago, home of thinkorswim.com, the amazing thinkpro setup - - 160 monitors ,BEHOLD!!!....... Quote Link to comment Share on other sites More sharing options...
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