|
PureBytes Links
Trading Reference Links
|
At 13:58 21-10-00 -0400, you wrote:
>> I think I understand what you mean. But still, if you sell 3 times as many
>> contracts as you did in '98 you would still collect about 100 points. And
>> your risk will be the same in points, or in a percentage of your trading
>> capital !?
>
>The risk will go up 3-fold if he sold 3x contracts.
>
>The risk is linear to # contracts you're short, not the amount of $$ the
>premium makes up as a % of your trading capital or of the strike price one
>is short.
>
>Joe's on the right track re volatility premiums not being where they were in
>1998, except that the crash-type premiums exist on individual equities this
>time around and not on individual indices.
>
>Or - where they do on the indices, the fortunes sway swiftly. One has to
>look at BKX premiums, SOX premiums, and compare them to NDX or SPX premiums
>to understand why that happens.
>
>A recent example is CSCO as it approached $50, the clear as day May 24
>double bottom support level that correlated to Naz 3000.
>
>The implied volatility has / had recently pushed up premiums on the then at
>the money Nov 55 calls & Nov 55 puts that would bring you a 22% return on
>your "investment" if the stock went out at the shorted 55 strike at
>November's expiration.
>
>Put another way, if CSCO moved up or down 22% from $55 from - oh - last week
>to the 3rd Fri in Nov, you would need to "adjust" your strikes or your
>position to NOT start losing money.
>
>Was 22% good enough?
>
>In Joe's example of 1998, 100 points was the 22% this year's CSCO got.
>
>His risk, however, was not 100 points. It was the # contracts he had
>shorted.
>
>Same as this year, one's risk on CSCO is not 22% of $55. It is the #
>contractrs short.
>
>If one is short 10 puts and 10 calls. one would be obligated to pony up 1000
>shares above $67 and be ready to buy 1000 shares below $43.
>
>The fact that the $12,000 one collected as a result of shorting the 10 calls
>+ 10 puts is irrelevant to risk measurement - the risk is that one may not
>have the capital to buy & deliver 1,000 shares at $67 (or higher) against
>the short calls, or buy and keep $43,000 worth of CSCO stock below $43 with
>total downside exposure.
>
>And the fact that "great companies have limited downside" is - finally - a
>matter of history, as owners of Microsoft, Intel, Home Depot, Lucent, AT&T
>etc have discovered.
>
>The amount of 22% of $55 ($12) one would keep, if those 2 levels were not
>triggered, would be a function of where in between the range of $43 and $67
>CSCO went out on the 3rd Friday of Nov.
>
>Until that happened, one would be carrying the risk of being long 1000
>shares below $43 and short 1000 shares above $67.
>
>
>> And what is the difference in volatility of the underlying index between
>> '98 and now ?
>
>Pull up a chart of VIX to get the general picture. The sector-specific
>picture is different, though.
>
>Gitanshu
>
Thanks a bunch for your clear explanation. Now I learned two things: Where
I made the error in my way of thinking and that options are not for me.
Rgds
Frans
|