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TranceAddict Investors Club @ Marketocracy (pg. 185)
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| Comrade Stalin |
| quote: | Originally posted by Shakka
It is also as big a joke as EMH. |
How so? |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
How so? |
If you learned anything from the financial crisis, I hope you learned not to trust a model, let alone a particularly complex one that depends on assumptions that may or may not be completely ridiculous.
There's a great chapter in The Big Short about the guys who ran Cornwall Capital and how they were able to exploit the Black Scholes flaws to make a killing on some Capital One call options.
Models are a joke. Every analyst model is a joke because you can data-fit and make tweaks to your assumptions to rationalize your conclusions. Sure, there may be useful data that can be extracted, but to rely on a model in and of itself is foolish, imho. |
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| Comrade Stalin |
| quote: | Originally posted by Shakka
If you learned anything from the financial crisis, I hope you learned not to trust a model, let alone a particularly complex one that depends on assumptions that may or may not be completely ridiculous.
There's a great chapter in The Big Short about the guys who ran Cornwall Capital and how they were able to exploit the Black Scholes flaws to make a killing on some Capital One call options.
Models are a joke. Every analyst model is a joke because you can data-fit and make tweaks to your assumptions to rationalize your conclusions. Sure, there may be useful data that can be extracted, but to rely on a model in and of itself is foolish, imho. |
That is one thing to learn. Overly complicated models don't do much more than a simple one. The usual modeling project I embark on usually goes through several phases, one of the first being, every possible input/formula I can find going into it, testing it, then starting again from scratch on the same model, cutting out all the fat, until I have a steam-lined, simple formula, which does what I want it to.
As you stated, models can be tweaked to fit whatever I really want, and I do it all the time. But I wouldn't see that as a hindrance since finance is an art more than a science and so subjectivity should be embraced. Which leads to the assumptions. I can change them to my heart's desire, and they can be right 99.9% of the time, but that .01% happens and everything goes to . That's why I don't think I'll ever turn my models into a trading program. I want to use models as the basis of all my trades, but ultimately, I want to make the conscious decision to make a trade, something a computer can never do. And I have repeatedly come across instances in which my model said one thing, but upon closer inspection, I knew the model's recommendation to be the exact thing I shouldn't do. Example, a security reaches 52-high, model says sell, but the charts say buy. The trend is your friend rings a bell here, and buying would just mean losses.
The Big Short is an awesome book. Loved it! The Quants, you should also take a look at. Basically, everything you just said, is in that book. Quants who think their models are invincible get their asses handed to them. |
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| Capitalizt |
Bought TWM on friday. It's an ultrashort fund for the Russel 2000. The index is at a 1 year high and the ETF is at a one year low..so naturally I had to bite. ;)
Also got my first option..a put with a strike price of $23 on SLV. Expiration is Nov 10, which is exactly one week after the next fed meeting/QE announcement (Nov 3) as well as the midterm elections. So if anything crazy happens that causes silver to plummet after those two events, I'll have my current profit protected. The options were $110 each with is slightly less than 5% of market value for 100 shares. That seems like a very fair price to pay for peace of mind. |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
The Big Short is an awesome book. Loved it! The Quants, you should also take a look at. Basically, everything you just said, is in that book. Quants who think their models are invincible get their asses handed to them. |
I believe there is merit in what some of the quants do with their algorithmic trading and computers, but I certainly don't have the acumen or the interest in investing that way. Everyone has their own style and approach to markets. One comment I'd add with respect to quants with models is the assumptions they often don't make or don't realize--for example, that every other quant is doing the same thing. That was essentially part of the undoing of Long Term Capital back in 1998. You end up with a bunch of "me-too" funds and when a trade goes awry and gets unwound, the magnification of the trade when everybody does the same thing creates a giant cluster. |
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| Comrade Stalin |
| quote: | Originally posted by Capitalizt
Bought TWM on friday. It's an ultrashort fund for the Russel 2000. The index is at a 1 year high and the ETF is at a one year low..so naturally I had to bite. ;) |
Keep in mind that a leveraged ETF's leverage ratio is only correct on a daily basis. If the leverage is 2x, that is only for one day. The longer you hold a leveraged ETF, the further from the leverage ratio, it will deviate, many times against you. That is why I stay in a leveraged ETF for 2 or 3 days at the most. Usually, I am out within 24 hours. A good alternative if you plan on holding TWM longer than 3 days, is to simply buy VXX. You believe the market is going to decline in the near-term, because you bought an ultrashort fund. When markets decline, volatility usually rises. So, instead of owning a leveraged ETFs with very skewed results if you hold more than a few days, you can simply buy VXX, which should rise if the market declines, as you believe it will. VXX is also leveraged because its value derives from the value of put options, so you'll get bigger movements than if you just went long or short on the S&P500 for example. VXX can move 5+% in a day so that should give some idea as to how much it moves.
EXAMPLE OF WHY LEVERAGED ETF RETURNS ARE SKEWED
This theoretical ETF is leveraged 2x
Consider for instance the index returns for a theoretical week:
Monday: Down 5%
Tuesday: Up 3%
Wednesday: Down 4%
Thursday: Up 6%
Friday: Down 2%
Using the returns for the index, you would end up with a 2.42% loss for the week. So if you were using a leveraged fund you would expect your losses to be 4.84% and an inverse fund might be expected to gain 4.84%. But as I’ll show you, the math doesn’t quite work that way. Consider the returns for a $100 invested in a leveraged fund:
Monday: Down 10% - Now holding $90
Tuesday: Up 6% - Now holding $95.40 (90 times 1.06)
Wednesday: Down 8% - Now holding $87.77
Thursday: Up 12% - Now holding $98.30
Friday: Down 4% - Now holding $94.37
So you can see that with the compound interest kicking in for both losses and gains, the losses turn out to be 5.63% (significantly larger than simply double the index losses for the week). When you consider this scenario playing out over the course of a month or a year, you can begin to see how inefficient the fund can be for long-term performance.But lets look at the inverse fund. Would it actually outperform since its counterpart underperformed during this particular week? Here is the math on an inverse leveraged fund for the same period:
Monday: Up 10% - Now holding $110
Tuesday: Down 6% - Now holding $103.40
Wednesday: Up 8% - Now holding $111.67
Thursday: Down 12% - Now holding $98.27
Friday: Up 4% - Now holding $102.20
You can see that using an inverse double return fund actually returned 2.2% which is significantly less than you would expect. The index declined 2.42% for the week. You might expect the leveraged inverse fund to gain 4.84% but instead you only received 2.2%. Again, the compound math gets in the way when you have large swings back and forth.
| quote: | | Also got my first option..a put with a strike price of $23 on SLV. Expiration is Nov 10, which is exactly one week after the next fed meeting/QE announcement (Nov 3) as well as the midterm elections. So if anything crazy happens that causes silver to plummet after those two events, I'll have my current profit protected. The options were $110 each with is slightly less than 5% of market value for 100 shares. That seems like a very fair price to pay for peace of mind. |
Good. You have a thesis. That the Fed meeting might not be additional stimulus and QE. I don't know if I would use that as my own thesis because the overwhelming opinion is the Fed is going to devalue the currency, sending silver higher. Just something to think about when considering if the cost of the put is worth it. Something else you could do that brings in cash rather than you spending it is to write a call option. All you do is, instead of buying the option, you sell it. That's it. It's not complicated at all. Click the sell button instead of buy on your broker's platform.
You could sell the Nov 2010 $23 call options for $0.81 x 100 = $81. That's $81 in your pocket if SLV fails to break $23. If SLV does break $23 and the option is exercised against you, well, so what? You already own the stock, with profit, and they have to buy from you at $23. Also, they might not even exercise because only about 10-15% are ever exercised. So you might keep the $81 even if SLV breaks $23. You still lock in your profit at $23 but instead of paying for a put, you are making money instead selling to other call buyers. This is practically risk-free because you'll profit no matter what. Your only risk is SLV declines more than what you get selling call options against it. But hey, at least selling call options brings in premiums for you, AND at the same time, if you're sold call options are exercised against you (which only about 10-15% are ever exercised), they have to pay you $23 per share of SLV.
You can repeat this the entire time you own SLV. Every month, sell next month's call option whose strike is just above the current price of SLV. You might get exercised against but so what? You lock in your profit, and if you still like SLV, just buy it again, and continue writing call options against it every month. It's called "covered call writing". Because whoever you sell the call option to, they have the option to buy SLV at say $23 before expiration. It's covered because you already own SLV. It would be "naked" if you didn't own SLV but were writing call options on it. In that case, if someone exercised you, you'd have to go out on the market, buy SLV at the current market price (which will probably be higher than the strike otherwise there wouldn't be a reason to exercise in the first place), sell to whoever is exercising you at the strike of $23. But you're not taking THAT much risk! ;) |
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| Capitalizt |
| Thanks krypt. The short is just a gut feeling. If it doesnt go my way tomorrow, I'll be out of it. I also like the call writing "stop loss" strategy you mentioned on SLV. Decisions decisions.. :) |
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| Capitalizt |
| I'm seriously considering going to a 100% options strategy. It just seems like a better way to go about it IMO. You can potentially control the same amount of shares for a fraction of the cost of actually holding them long term..freeing up a huge amount of capital for other option trades. The only benefit of a long stock position is the ability to write covered calls on it. But aside from that, I see no benefit of actually buying shares. You get much more upside if your option picks turn out to be correct. Obviously the volatility works both ways..but the reduced cost of each contract should make it possible to absorb a few complete losses without much pain. |
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| Comrade Stalin |
| Just make sure you paper trade whatever strategy you have in mind. I made the mistake of being too eager to jump into options trading and my first few trades wiped me out like 80%. I'll always be here to critique whatever trade idea you've got too...;) |
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| Capitalizt |
*cries*
I didn't buy it.. It's at $3.80 now. I could have made 33% in 2 weeks. :(
Edit..it hit $4.15 today :( :( :( |
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| Nrg2Nfinit |
said it once and ill say it again. The best way to make money is to write options.
Why do you think insurance companys make so much money? |
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