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Re: [Metastockusers] Stock Option



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Freddie
I can send many many articles your way regarding a 
secular bear market. I do have one though that came from my broker that 
shows it very simply.
I was thinking of placing a PUT on the DOW (ticker 
DIA)in the amount of 5k. A leap so I would get the time frame I want. I would 
also do this on the Nasdaq (ticker QQQ). I 
was trying to calculate the potential profit. I know the potential loss is 
everything but it would hedge my remaining mutual funds and retirement 
account.  I was trying to figure out the potential 
gain.  
 
You are right the ticker was VSEA
I will send along the article to your 
address.
 
Regards Martin
 
 
<BLOCKQUOTE 
>
  ----- Original Message ----- 
  <DIV 
  >From: 
  Freddie 
  Ng 
  To: <A 
  title=Metastockusers@xxxxxxxxxxxxxxx 
  href="">Metastockusers@xxxxxxxxxxxxxxx 
  
  Sent: April 08, 2003 11:01 PM
  Subject: Re: [Metastockusers] Stock 
  Option
  Martin,I must declare that I am no expert but I could 
  share the theory of hedging on stock using option.I presumed that you 
  already own a long position in stock and you want to maintain that stock at a 
  specific price, say you own 100 shares of ABC at $50. To hedge the long 
  position, you can buy puts as an insurance against the drop in long position 
  price. This is where the GREEKS come into play, i.e., Delta, which is the rate 
  of change of an option with respect to a change in underlying. As you know, a 
  long position in stock has a delta of 1. So you must buy put at $50 strike 
  price, assuming at that strike price, its delta is 0.25, then you need to buy 
  4 contracts. If each contract worths $2, then the total cost would be (4 X 2 X 
  100)= $800. Once this is achieved, you have attained a net position delta 
  equals to zero, which is perfect hedge. However, in practice, you can't 
  achieve perfect match, something close is good enough. How did 
  the Puts protect the long position ? I assumed you understand the risk/reward 
  chart of put. The max risk is the $800 premium paid if the underlying price 
  goes above the strike price and option will expired worthless. The reward is 
  unlimited if the underlying price falls below the strike price(more specific 
  B/E point), the puts will rise in value proportionately according to the 
  option delta. By purchasing puts worth $800 premium, you have 
  ensured that no matter what happens to the price of stock, you will be able to 
  sell 100 shares of ABC for $50/share. If the stock price declines, two actions 
  you can take. Sell the put options(that is gaining value) for a profit or 
  exercise the put contracts for your right to sell the underlying at $50. 
  Whichever situation is best you have to do the maths to maximize your 
  return.A word of caution, option is a very risky instrument, as it 
  involves expiration unlike stock. Your premium paid is not retrievable unless 
  the option is performing well. The beauty in option is the leverage you 
  enjoyed if you can predict the direction correctly, your outlay is much lower 
  than in stock. Imagine a small premium of $200 can control 100 shares of 
  stock, if share price is %50, you are controlling $5000 worth of stock with 
  $200 premium. By saying that, I hope I'm not soliciting traders to jump into 
  option trade, you are doing it at your own risk.Like to learn from you 
  on point and figures, is it effective tool ?That's all 
  folks.Best RegardsFreddie Ng
  
  At 07:43 PM 4/8/2003 -0400, you wrote:
  <FONT face=arial 
    size=2>Freddie  PabloI was wondering 
    if you could help with a few beginner type questions? <FONT 
    face=arial size=2>I just became interested in Options and was thinking of 
    using it as a hedge as well as short term.  <FONT 
    face=arial size=2>I am hearing rumors from many different areas that the 
    bottom will be in 2006. One chart actually mentions Dec 26 2006 and a 50% 
    drop from here. I though a simple put on the DOW and NASDAQ would act like a 
    good hedge for my long positions.  Using 5k as an example for two PUTS 
    leaps. First terminology. How would you state that. Buy a.... contract on 
    the  ???For a PUT on the DOW does 
    drop 50% I would be up how much? Obviously if I am wrong it is all 
    gone. I suppose if felt really 
    strongly about this I could by Call options on  
    Gold I was following 
    ticker   (VESA ) UESQD.X  PUTS late last week and noticed it 
    is now at 1.90 up from 1.60. If one was used to taking 10k positions on a 
    stock could one now take 2k positions. If so I would assume the most would 
    lose is 2k if it expired.  BTW I 
    am back to using point and figure charts.  Regards 
    Martin  
    
      ----- Original Message ----- 
      From: Freddie Ng 
      To: <A 
      href="">Metastockusers@xxxxxxxxxxxxxxx 
      
      Sent: April 08, 2003 12:18 AM
      Subject: Re: [Metastockusers] Stock Option
      Pablo,
      Thanks for the advise for buy/sell on volatility. You are right, the 
      IV high-low must have a base for reference, otherwise it is meaningless. 
      If we can have a  historical volatility of the option IV, that should 
      serve our purpose, right ?. Apply IV/HV will then yield the ratio, if 
      ratio <1, buy and if ratio is >1 sell. Is this what you use ? 
      
      Thanks for the Meta HV formula, on comparison, I realize I had it 
      programmed in my indicator already. It was kind of you to point out that 
      HV is for stock and not on option. I would have taken it for 
      option.
      The IV indicator you mentioned is referring to the "option volatility" 
      in the indicator drop down menu ?
      As for the Greeks, as an example, say you bought a call, its price 
      will rise dollar for dollar with the stock if delta is 1, if the delta is 
      near to zero, even if the stock gap up, you would not see any up price in 
      option. Such position should be disposed asap. Delta of 0.5 has the max 
      time value with no intrinsic value. If trade is against your direction, 
      for every dollar of stock decline, option will fall by 50cts. Direction is 
      abstract if we can forecast direction accurately, buy simple call and put 
      will be neat, forget about other complex strategies in options. Then we 
      will enjoy the leverage in options, less outlay and high % return. 
      However, volatility could override greeks.
      Best Regards
      Freddie Ng
      
      
      At 11:54 PM 4/7/2003 -0300, you wrote:
      
        I actually didnt mention specific options 
        soft on account your request was related to metastock capabilities and 
        use for options, the best options soft is optionvue, or you can use the 
        web service of <A 
        href="">www.optionetics.com.
        there is other site like <A 
        href="">www.IVolatility.com
        forget about the greeks in my experience 
        they dont add anything crucial to your trading, but volatility is 
        crucial, this was the reason i used the ip/hv ratio when i was still 
        investing in options in the american market
        mostly you must buy low volatility and sell 
        (or write) high volatility, but the problem is high or low comparing to 
        what, so i started to use the ratio to spot it fast, i dont have the 
        exact code for the ratio with me, but you can find the iv indicator on 
        metastock quick indicator list and for the hv i usethis 
        formula:
         
        <FONT face=arial 
        size=2>Std(Log(C/Ref(C,-1)),10)/Std(Log(C/Ref(C,-1)),100)
         
        make notice that while the implied is 
        calculated based on the option price the hv is calculated on the 
        underlying.
         
        about the <FONT 
        face="Times New Roman, Times">group/industry ranked by their volatility, 
        you can find in the sites mentioned by me and debra that 
        infomation
         
        i never used it but optionetics is very much 
        discussed and recommended inoptions boards and usenet groups, but as a 
        rule you should check the cboe site
         
        Bye 
        ----- Original Message ----- 
        From: Freddie Ng 
        To: <A 
        href="">Metastockusers@xxxxxxxxxxxxxxx 

        Sent: Sunday, April 06, 2003 10:13 PM 
        Subject: Re: [Metastockusers] Stock Option
        Pablo,
        Appreciate your valuable systematic explanation. Those points that 
        you discussed were very important in option trading. If it can determine 
        or anticipate the correct underlying direction, this info can then be 
        used to interpret the option direction. Call follows underlying while 
        Put is reverse. I also understand that not all indicators are suitable 
        for each stock and Metastock can search and match the best indicator to 
        optimized profit, I wonder if I had missed out anything in Metastock for 
        option.
        Volatility(implied and Historical) 
        Keen to know how you use these info to analyze the option. I am 
        aware that one can lost trade due to volatility. You mentioned about use 
        ratio of IV & HV, can you elaborate a little bit more. The option 
        volatility indicator is for IV, how do you obtain HV in Metastock. 
        Btw, do you have any good source where I can obtain the volatility 
        info. Is there any such listing of group/industry ranked by their 
        volatility.
        Best Regards 
        Freddie Ng
        At 04:07 AM 4/5/2003 -0300, you wrote:
        
          Freddie,
          on using metastock for options you have 2 problems
          1 Data problem 
          2 analysis problem
          1 since options trade for a short period, the problem arises, you 
          cannot 
          make any analysis for a while, there is 2 ways around it : 
          continuos 
          contracts (i tried them for a while , but they are not reliable in 
          my 
          opnion), the alternative is using intraday data, so even if you 
          can make 
          analysis on daily charts for a while, at least you can run 
          intraday an.
          2 about the analysis: 
          you must keep an eye on the stock or whatever the option is for 
          then you can analyze the option itself by common tech an. tools 
          then you have to keep an eye on implied volaitity and hystorical 
          volatility, 
          for while i used a ratio between the implied volatility and 
          hystorical 
          volatility 
          check the quick drop indicator youll find some options 
          indicators
          Pablo 
          ----- Original Message ----- 
          From: "freddie_ng" <n07476@xxxxxxxxxxxxxx> 
          To: <Metastockusers@xxxxxxxxxxxxxxx> 
          Sent: Saturday, April 05, 2003 2:00 AM 
          Subject: [Metastockusers] Stock Option
          > Hi all Metastock experts, 
          > 
          > Can anyone enlighten me how to make use of Metastock to trade 
          on 
          > options. I own a Metastock ver 8.0, just recently upgraded 
          from v7.2. 
          > 
          > Best Regards 
          > Freddie Ng 

  
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