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TranceAddict Investors Club @ Marketocracy (pg. 169)
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| Comrade Stalin |
| quote: | Originally posted by Shakka
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. |
Well, I'm new to the options game. All I have is my "Options As A Strategic Investment" book (really my options bible). Let us see how my first foray turns out. I believe I have done all the due diligence I could do. I have until the fall so time is relatively on my side. Next I want to limit downside risk too, maybe buy a put option in a stock I think is grossly overvalued. I have never hedge before so this is as exciting as driving for the first time. |
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| Comrade Stalin |
| I'm starting a hedge fund. Who wants to be a partner in Betapeg Capital, LLC?? |
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| Comrade Stalin |
| Bought June 30 put on SU for $0.75. |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
Bought June 30 put on SU for $0.75. |
So basically (and I'm certainly not saying I'm right!), this is how I'd look at that.
First, I know SU is a pure-play on Alberta Oil Sands and I believe that it is economical for them to produce from the tar sands as long as oil is above $60 or somewhere around there (if memory serves). Oil is at $82.60 as I write this and June is pretty close so I might think that's a risky bet (though not much capital is at risk and stocks are volatile so it could certainly still work).
So..SU is at $33.40 and in order for your option to break-even, you need SU to go to $29.25 or lower. Essentially that means you need about a 12.5% decline in the stock price by June in order for the strategy to work, or else they will expire worthless. Now, SU could decline before expiration and those options could easily increase in value and you could make a profit ahead of expiration. However, all of that premium you paid (whopping $0.75!) will gradually be eroded as expiration approaches as long as SU stock trades above $30. So anyway, I'd look at it as paying a 12.5% premium (not quite the right language but that's how I try to think about it when I do it) for the option. That's not terribly high, but given you only have 2 months for it to work, that might be a relatively high price to pay for a small window of time. Usually I will try to keep my premium around 10% or so (though I've paid much more and had success and failure) and try to buy myself as much time as possible in order for the strategy to work. But, that's just me and my view. I'm not sure what the book you read suggests.
Btw, since each option contract holds the option on 100 shares, I believe the cost you really paid is $75 for the whole position (net of broker commissions). |
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| Comrade Stalin |
| quote: | Originally posted by Shakka
So basically (and I'm certainly not saying I'm right!), this is how I'd look at that.
First, I know SU is a pure-play on Alberta Oil Sands and I believe that it is economical for them to produce from the tar sands as long as oil is above $60 or somewhere around there (if memory serves). Oil is at $82.60 as I write this and June is pretty close so I might think that's a risky bet (though not much capital is at risk and stocks are volatile so it could certainly still work).
So..SU is at $33.40 and in order for your option to break-even, you need SU to go to $29.25 or lower. Essentially that means you need about a 12.5% decline in the stock price by June in order for the strategy to work, or else they will expire worthless. Now, SU could decline before expiration and those options could easily increase in value and you could make a profit ahead of expiration. However, all of that premium you paid (whopping $0.75!) will gradually be eroded as expiration approaches as long as SU stock trades above $30. So anyway, I'd look at it as paying a 12.5% premium (not quite the right language but that's how I try to think about it when I do it) for the option. That's not terribly high, but given you only have 2 months for it to work, that might be a relatively high price to pay for a small window of time. Usually I will try to keep my premium around 10% or so (though I've paid much more and had success and failure) and try to buy myself as much time as possible in order for the strategy to work. But, that's just me and my view. I'm not sure what the book you read suggests.
Btw, since each option contract holds the option on 100 shares, I believe the cost you really paid is $75 for the whole position (net of broker commissions). |
This is a 2 week hedge on my expectation that oil and the market may be down over the course of the next 2 weeks. I purposefully went for a $.75 put option which I plan to sell before 30 days to expiration. I do not plan on exercising the option but just making money off the change in value of the option itself. So with that in mind, does the premium still matter? So the general rule for you is you want the premium to be less than 10%. I should keep that in mind. I made this bet on my own. I didn't use the book to make this trade. What would be a good hedge on TNDM calls? |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
This is a 2 week hedge on my expectation that oil and the market may be down over the course of the next 2 weeks. I purposefully went for a $.75 put option which I plan to sell before 30 days to expiration. I do not plan on exercising the option but just making money off the change in value of the option itself. So with that in mind, does the premium still matter? So the general rule for you is you want the premium to be less than 10%. I should keep that in mind. I made this bet on my own. I didn't use the book to make this trade. What would be a good hedge on TNDM calls? |
I agree that it's definitely better to try and buy and sell the options as opposed to exercising them (which probably adds fees anyway). If oil goes down, SU likely will too, little question about that. In that regard, the premium is less important, but it is a good gauge to me as to how expensive the option is that I'm buying and what that might tell me about sentiment as well. 10% is certainly not a hard/fast rule for me, rather just an area I keep in mind for discipline to make sure I don't buy an option at any cost (because I truly believe that you really need to be cost sensitive on them in order to maximize the success of the strategy). For example, the cost of very near-dated calls on the VIX index has been in the 25% range lately. Frankly, no matter what the cost, they would have worked beautifully on a day like yesterday when the VIX shot up on the market flush, but it's just too much to pay IMO (and not difficult to understand if the bet is very one-sided given the VIX trading back near historical lows).
I didn't necessarily want to get into technical analysis, but I might bring that into the picture as well (as I find that technicals are often an overlay on the options break-even if you look closely). SU seems to have decent near-term support in the $28-30 range...oddly/coincidentally that is near the price you'd need SU to go in order to break-even on your put option (assuming you held to maturity). That's not a big deal, but sometimes I'll look at a security and an option and realize that I would need a major break-out (on calls) or major break-down (on puts) in order for the strategy to work--at that point I have to believe I'm looking for a major catalyst. If I don't see a big potential catalyst I'd be hard pressed to take the additional risk on a put option (and I might just short the stock, though that brings in a whole new gamut of risks that simply aren't appropriate for retail investors).
I don't know what would be a good hedge against TNDM calls because I don't know the company. Maybe an equal put option position on a low quality telco provider? Maybe you don't need to hedge it? I dunno. |
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| Capitalizt |
| Either of you want to help me out? My main holding is SLV. I'm anticipating it to be at $22-25 by the end of next year..and $30+ by late 2012. I was planning to hold the stock and enjoy the run up..but hypothetically, what type of profits are available if I were to place these bets with an option today? I read the options page for it at yahoo and it's all foreign to me. |
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| Comrade Stalin |
| quote: | Originally posted by Shakka
I agree that it's definitely better to try and buy and sell the options as opposed to exercising them (which probably adds fees anyway). If oil goes down, SU likely will too, little question about that. In that regard, the premium is less important, but it is a good gauge to me as to how expensive the option is that I'm buying and what that might tell me about sentiment as well. 10% is certainly not a hard/fast rule for me, rather just an area I keep in mind for discipline to make sure I don't buy an option at any cost (because I truly believe that you really need to be cost sensitive on them in order to maximize the success of the strategy). For example, the cost of very near-dated calls on the VIX index has been in the 25% range lately. Frankly, no matter what the cost, they would have worked beautifully on a day like yesterday when the VIX shot up on the market flush, but it's just too much to pay IMO (and not difficult to understand if the bet is very one-sided given the VIX trading back near historical lows).
I didn't necessarily want to get into technical analysis, but I might bring that into the picture as well (as I find that technicals are often an overlay on the options break-even if you look closely). SU seems to have decent near-term support in the $28-30 range...oddly/coincidentally that is near the price you'd need SU to go in order to break-even on your put option (assuming you held to maturity). That's not a big deal, but sometimes I'll look at a security and an option and realize that I would need a major break-out (on calls) or major break-down (on puts) in order for the strategy to work--at that point I have to believe I'm looking for a major catalyst. If I don't see a big potential catalyst I'd be hard pressed to take the additional risk on a put option (and I might just short the stock, though that brings in a whole new gamut of risks that simply aren't appropriate for retail investors).
I don't know what would be a good hedge against TNDM calls because I don't know the company. Maybe an equal put option position on a low quality telco provider? Maybe you don't need to hedge it? I dunno. |
SU was such a newb move. I made it in haste too. Buying a put on a low quality telco does sound a lot better. Thanks for all the advice. How did you get your job if I may ask? I would love to be paid to invest and trade. I may have a meeting with a wealthy person in a couple weeks so hopefully that'll be my big break. |
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| Comrade Stalin |
| quote: | Originally posted by Capitalizt
Either of you want to help me out? My main holding is SLV. I'm anticipating it to be at $22-25 by the end of next year..and $30+ by late 2012. I was planning to hold the stock and enjoy the run up..but hypothetically, what type of profits are available if I were to place these bets with an option today? I read the options page for it at yahoo and it's all foreign to me. |
Let us say you think the price will be $22 in January 2012 which is conservative according to your prediction. You could buy the Jan 2010 $22 strike call option for $1.75. Each option contract gives you rights to 100 shares of that security. So you multiply $1.75 x 100 = $175 is the subtotal for the cost of buying that option. Each broker charges fees just as if you were buying stock so you have to add that too. Mine charges $5 per trade so I would pay $180 per Jan 2012 $22 call option. You could buy 5 SLV Jan 2012 $22 call options for 5 x 1.75 x 100 = $875. If SLV does get to $22, you'll most likely make way more than if you have just bought only the security.
Check it out here.
http://finance.yahoo.com/q/op?s=SLV&m=2012-01
Look at the call option with a strike of $22. The prices will probably have changed from the ones I used above. But to calculate the cost of an option, remember it's, (last price of option) x 100 = cost of 1 option. |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
SU was such a newb move. I made it in haste too. Buying a put on a low quality telco does sound a lot better. Thanks for all the advice. How did you get your job if I may ask? I would love to be paid to invest and trade. I may have a meeting with a wealthy person in a couple weeks so hopefully that'll be my big break. |
In all honestly, dumb luck. I was an econ major in college and was working at a bank out of school and got a phone call one day from the company I work at--they were looking to expand their staff and needed someone to start at essentially the bottom rung of the investment world (operations/back office/trade settlement). It's a small company and my boss and I went to the same school and have similar backgrounds and he's always given me opportunity to grow and do what I want as long as he thinks I can handle it. Most people have to go to a bulge-bracket sell-side firm (Merrill, Lehman, Goldman, etc) before they break into the buy-side (fund manager/money management). I really just fell into it and have really grown to enjoy it, even when it means waking up at 4:30 and going to bed at midnight.
Edit: I should add that there was a man in the trust department of the bank I was working at who had worked at a brokerage firm in NYC with the lady who was the staffing manager at the place that called me. That was really how my name got in the mix. So..dumb luck. |
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| Comrade Stalin |
| quote: | Originally posted by Shakka
In all honestly, dumb luck. I was an econ major in college and was working at a bank out of school and got a phone call one day from the company I work at--they were looking to expand their staff and needed someone to start at essentially the bottom rung of the investment world (operations/back office/trade settlement). It's a small company and my boss and I went to the same school and have similar backgrounds and he's always given me opportunity to grow and do what I want as long as he thinks I can handle it. Most people have to go to a bulge-bracket sell-side firm (Merrill, Lehman, Goldman, etc) before they break into the buy-side (fund manager/money management). I really just fell into it and have really grown to enjoy it, even when it means waking up at 4:30 and going to bed at midnight.
Edit: I should add that there was a man in the trust department of the bank I was working at who had worked at a brokerage firm in NYC with the lady who was the staffing manager at the place that called me. That was really how my name got in the mix. So..dumb luck. |
Damn I guess I have to make my own luck. |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
Damn I guess I have to make my own luck. |
I guess part of it comes down to who you know and how you network. We had a guy intern with us last summer and managed to connect him with some good contacts and he's now going to do an internship in China this summer. Now THAT is an opportunity I wish I had had! I think that will take him places he probably never thought he'd go.
Where does that quote come from? "We make our own luck" or whatever it is. Isn't that from a movie? |
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