We provide some outside-the-box classes at OptionsANIMAL for members who have come to learn about options behavior, so that they can make a nice profit in their accounts. These classes are in the educational level 8 (top of the curricula) and are labeled “Vegas Trades.” Although we spend some time in the basic education classes showing the importance of implied volatility (IV), we don’t get specific about what can happen to the value of the trade as the IV changes.
We are having our annual equity plan in January here at OptionsANIMAL. When I take a look at the tracking of the equities that were named by OA staff this time last year, I found that they were ranked according to how bullishly they performed during the 2014 year. Other statistics were given, too: Ticker Symbols, Current Fair Market Value, Daily Change (Price), Daily % Change, 52 Week Range, Dollar Change From Selection, % Change from Selection, Beta, Dividends, Ex-dividend Dates, Date of EPS, Sector, Industry, Related Companies. When I take note of the three that I selected, I see that Facebook was the only one that ranked well during the year in terms of change in Fair-Market-Value.
Have you noticed that as soon as we ring in a new year, the commercials on TV change? Gone are the decadent advertisements urging us to splurge on food, jewelry and cars – replaced by ads for weight watchers, gym memberships and ways to monitor our credit scores. The beginning of a new year prompts most of us to take a hard look at the previous year and all too often we find more to regret than celebrate. We beat ourselves up over our failures and vow to do better in the future. This is as true for our trading results as for every other part of our lives.
I was reviewing a list of potential topics for a BLOG when I was touched by one in particular: Financial Crisis Collar Strategy. That topic reminds me of a collar strategy that I managed in order to generate a capital gain with a stock when I sold it more than 50% below the purchase price. What? You are kidding, right? Well, you tell me.
- On August 6, 2008 I bought Long Stock (LS) at $42.62.
- I also bought January 40 Long Put (LP) at $3.94
- Also, I entered a January 45 Short Call (SC) at $4.81
Have you ever experienced sitting in front of your trading computer, ready to pull the trigger on a well-researched trade, only to find that you simply can’t push the button? Let’s face it, we are emotional beings – and there is definitely an emotional component to trading and investing that can be just as challenging to master as the process of choosing and researching equities to invest in. For some of us, working with these emotions is the greatest trading obstacle we face.
Every weekday I turn on my computers at about 8:30am and see what my watchlist is doing before the market opens. For a long time, I recorded what the market was doing about an hour before the open, at the open, at noon and at the close. I had hoped to gain an edge for trade entry and exit.
Trading can be a mental game, at least for me. I use to trade with very directional trades. I was delta positive when I believed the market would be bullish and delta negative when I believed the market was bearish. All of my trades were theta positive so they could work in a sideways market too, just not as well.
For several years now, we have heard pundits and prognosticators go on and on about the risks of strong – even perhaps runaway – inflation as a result of too much easy monetary policy for too long. Five years into the great experiment of zero interest rate policy, we still show headline inflation numbers to be running below the Fed’s stated goal of 2%. It seems that the vigilance that has been paid to curbing a rapid path of inflation is now creating concern about just the opposite – a significant period of weakening or falling prices. We see this situation in Europe as prices are currently flat or falling. Japan is struggling to recover from over two decades of deflation. Even in China, which has been a leading economy for some time, price growth is just half of the official four percent target.
Many years ago when I was in college, my family was contacted by a major oil company. They asked if we would be willing to have an oil well placed in the middle of our property. We had 10 acres with nothing on it that we rarely visited. Each member of the family owned an equal share of the property. They contacted all the surrounding property owners also. They offered each owner a portion of the profits from the well. Since the well was in the middle of our property, we got the largest share of the profits. My family had no idea what a good offer was, so we just took what they offered us.
There are no limits to the things you can do with options. Many people are already familiar with the use of options for hedging risk and increasing leverage. Today, I want to talk about the use of options for simulating trades that usually require equity ownership and therefore demand a large use of capital. A thorough understanding of options and their characteristics can allow you to design trade structures that yield most of the benefits of stock ownership without having to own the underlying stock. For the purpose of this article, I am going to ignore the effects of the bid-ask spread, interest rates and dividends, in order to simplify the explanation. In reality, these things do matter, but if you apply these concepts to a highly liquid equity that does not pay a large dividend, they should not matter much.