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TranceAddict Investors Club @ Marketocracy (pg. 168)
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| Shakka |
| quote: | Originally posted by Comrade Stalin
For all you value investors out there, take a look at "Long-term Equity AnticiPation Securities" or LEAPS. Instead of buying the stock itself, buy a call option that expires more than a year from now. That's all they are. Long-dated stock options. So you could buy 100 shares of stock at $12 for $1200. Or you could just buy say $200-300 on a long-dated call option and limit your downside risk to just $200-300 while taking advantage of unlimited upside potential in addition to the leverage such a security gives you. Leverage as in, for every 1 point move up the stock makes, the option may go up two or three times as much. With $1000 you could get exposure to 3 stocks and still have some cash left over. Otherwise, if you are just going to buy the stock itself, you really could buy much. If you wanted 100 shares, the stock would have to be less than $10, you could only really buy 1 stock. Anyways, google it.
LEAPS
Also, I highly recommend this book, basically the holy bible of stock options which I think are more exciting than stocks.
Options As A Strategic Investment by L. G. McMillan
http://catalog.ebay.com/Options-Str...d=p3286.c0.m271
Don't even think about touching options until you get this book. |
Do you trade options? I do the options trading at our shop. I have mixed feelings on LEAPS though...so much time value that is a guaranteed loss of principal as they mature, but a nice long-term call option nonetheless. The best trade I ever had with them was a small position I bought in XLF leaps near the peak of the crisis. They weren't scheduled to mature until 2011, but I ended up selling them for about 150% profit after about 9 months. |
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| Comrade Stalin |
| quote: | Originally posted by Shakka
Do you trade options? I do the options trading at our shop. I have mixed feelings on LEAPS though...so much time value that is a guaranteed loss of principal as they mature, but a nice long-term call option nonetheless. The best trade I ever had with them was a small position I bought in XLF leaps near the peak of the crisis. They weren't scheduled to mature until 2011, but I ended up selling them for about 150% profit after about 9 months. |
I just bought...
TNDM $17.40
Sept 17.50 @ 1.90
Dec 20.00 @ $1.50
I bought at the ask price. Is that normal? Because the market price is in the middle of the bid and ask price and I bought at the ask price which in this case is 12% above the market price. So I am already down 12% right out of the starting gate.
My limit to sell is 30 days before expiration date. Don't want that exponential time decay (which I am still working to understand completely) ruin my returns. |
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| Capitalizt |
| quote: | Originally posted by Comrade Stalin
I bought at the ask price. Is that normal? Because the market price is in the middle of the bid and ask price and I bought at the ask price which in this case is 12% above the market price. So I am already down 12% right out of the starting gate. |
If you buy at market, you will always pay ask. Never place a market order unless you have a very highly traded stock with a tight spread between bid/ask. I don't trade these days, but when I did I would always put my buy orders on lower volume stocks as limit orders a few cents above the current bid. 90% of the time they get filled..You just need to wait a few minutes. |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
I just bought...
TNDM $17.40
Sept 17.50 @ 1.90
Dec 20.00 @ $1.50
I bought at the ask price. Is that normal? Because the market price is in the middle of the bid and ask price and I bought at the ask price which in this case is 12% above the market price. So I am already down 12% right out of the starting gate.
My limit to sell is 30 days before expiration date. Don't want that exponential time decay (which I am still working to understand completely) ruin my returns. |
One of the reasons I hate trading options (and a real danger for retail investors) is that they are generally less liquid (with exceptions on major market cap stocks and indices) and have relatively wide bid/ask spreads. Usually a buyer is going to have to pay the ask and a seller will have to accept the bid, and sometimes these spreads can be huge and can make it an unprofitable exercise.
I have an institutional ECN that I use to trade options and usually I use algorithms to do it which allows me to not show my hand and play in the dark pools and hope for execution somewhere in between the bid/ask. However, if I really need to get done, I usually have to give something up to find the liquidity.
You're definitely right that it's often dangerous to hold them to maturity because prices of securities tend to move closer to the biggest open interest, as the market likes to screw the most people possible!
Now, if you only have a small option position to buy, liquidity may not be a big issue for you. But often times I'm buying or selling thousands of contracts and the trading patterns are so lumpy that it can be quite a challenge, particularly if you are trying to preserve the time value premium that is embedded in them. |
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| Capitalizt |
| I've never done options.. Can you not place a limit order on them? |
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| Comrade Stalin |
| quote: | Originally posted by Shakka
One of the reasons I hate trading options (and a real danger for retail investors) is that they are generally less liquid (with exceptions on major market cap stocks and indices) and have relatively wide bid/ask spreads. Usually a buyer is going to have to pay the ask and a seller will have to accept the bid, and sometimes these spreads can be huge and can make it an unprofitable exercise.
I have an institutional ECN that I use to trade options and usually I use algorithms to do it which allows me to not show my hand and play in the dark pools and hope for execution somewhere in between the bid/ask. However, if I really need to get done, I usually have to give something up to find the liquidity.
You're definitely right that it's often dangerous to hold them to maturity because prices of securities tend to move closer to the biggest open interest, as the market likes to screw the most people possible!
Now, if you only have a small option position to buy, liquidity may not be a big issue for you. But often times I'm buying or selling thousands of contracts and the trading patterns are so lumpy that it can be quite a challenge, particularly if you are trying to preserve the time value premium that is embedded in them. |
I have heard of the strategy where you buy deep in the money LEAPS on a stock and it moves almost in tandem with the stock and so it appears to be a better alternative than buying the stock itself. I am buying one slightly out of the money call, and a $2-3 out of the money call, thinking that if the stock rises like I think it will, the price of those options will be rise big. I also have more than 200 days to expiration on both. Is that a good strategy? |
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| Comrade Stalin |
| quote: | Originally posted by Capitalizt
I've never done options.. Can you not place a limit order on them? |
Yes you can but it far harder to secure the price you want than if you did it with stocks. A normal stock may have a volume of millions. An option may only have a volume of a couple dozen. One of the options I traded today only had a volume of 35. |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
I have heard of the strategy where you buy deep in the money LEAPS on a stock and it moves almost in tandem with the stock and so it appears to be a better alternative than buying the stock itself. I am buying one slightly out of the money call, and a $2-3 out of the money call, thinking that if the stock rises like I think it will, the price of those options will be rise big. I also have more than 200 days to expiration on both. Is that a good strategy? |
Of course it would be highly correlated with the stock itself, but in that situation buying something that far in the money defeats a large reason why I use options (i.e. to get more leverage/beta). I guess it would depend on the price of the underlying stock to some degree. (i.e. GOOG is a $500 stock, but you can get options for much less so you can get a lot more "pin action" out of them if you do it right and they work. Usually I look at stuff trading near-to or at-the-money. If I buy out-of-the-money it's more speculative, but when/if it works the leverage is even better. Options are a risky thing to trade--you can lose your shirt in a heartbeat. For example, I was fortunate enough to buy a slug of market puts yesterday and sold them in the last 10 minutes of the day today on the market wash-out. Whether that was right or wrong, I made over 100% on the position in a single day. Granted, as a percentage of my portfolio, the position sizes are relatively small (Maybe 30-40bps tops). However, on a day like today they generated serious alpha. But, if the market bounces tomorrow, those gains would evaporate faster than you can say " me!" Anyway, I'd hate to be the guy that sold those puts to me because he probably lost his shirt today.
Another thing about options is that they're usually an all-or-nothing game for me. Either they work or they don't. If they don't, I lose 90-100% (depending on if I am able to get out and cut my losses if it's clear they're not going to work). If they do work, the returns are usually huge.
Naked put/call positions are generally not well suited for retail investors, imo. |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
Yes you can but it far harder to secure the price you want than if you did it with stocks. A normal stock may have a volume of millions. An option may only have a volume of a couple dozen. One of the options I traded today only had a volume of 35. |
Some of the options I trade don't have any actual volume for days/weeks at a time. Instead the bid/ask prices just move around with the stock action until someone decides to make a move. They are strange like that. |
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| Capitalizt |
I'd be paranoid buying fancy crap like that..Too much research and too much stress holding it, lol
The total research time I've spent on stocks over the past 12 months is 0.00 hours. :) still doing pretty well with my two positions GLD and SLV. |
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| Joss Weatherby |
I took a bet on one local financial institution and it has been nothing but good!
COLB ftw. |
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| Comrade Stalin |
| quote: | Originally posted by Capitalizt
I'd be paranoid buying fancy crap like that..Too much research and too much stress holding it, lol
The total research time I've spent on stocks over the past 12 months is 0.00 hours. :) still doing pretty well with my two positions GLD and SLV. |
Hah, the thing with options is, if it fails, you lose everything. 100% gone. But, you can get leveraged returns, say 50% on a 10% stock move. Also, you put up much less money, say $300 instead of $2000. Yea, you may lose 100% of $300, but at least you didn't lose say $600 if you had just bought the stock and it tumbles. Options limit risks and provide unlimited reward if you play your cards right. |
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