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Recall this post from June 18th about Schiller's
100% strategy? At that time the July 560 calls were
a long way away, now they are in the money. Of course,
there is still time and they might expire worthless.
I do feel this approach has potential and I have traded
it in the past, but it is not easy and the heat is
often on.
Tom T.
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Mark Johnson wrote:
Has anyone else read this book? I got my copy from Windsor
Books, for about $55. I would like to exchange opinions
with other purchasers/readers by email.
The book advocates two strategies using stock index
options, either the OEX (CBOT) or the SIS (LIFFE).
One of the options strategies is intermediate-term
(approx 30 day trade duration) and the other is short-term
(approx 2 hour trade duration).
His intermediate-term strategy boils down to this: index
options are chronically overpriced, particularly far-out-of-
the-money options. So you should sell options and collect
the inflated premiums and you'll do great. Schiller
establishes option spreads (e.g. sell a call, buy a call
further out) for a net credit ("credit spreads" in Ken
Trester books).
Schiller abandons the standard options pricing models
(Black-Scholes, Cox-Rubenstein-Ross, et al), and instead
presents his very own formulae for options probabilities.
Using his own equations, Schiller finds that if you sell
credit spreads with about 4 weeks till expiration, far enough
out-of-the-money that the net credit is one, then that spread
will typically have about a 95 percent chance of expiring
worthless, and you will get to keep the entire premium (1).
An example:
It is 9:20AM PDT on Thursday June 18, 1998.
The cash OEX index is presently 536.40
July 98 calls @ strike=560 are trading at 3
July 98 calls @ strike=565 are trading at 1 7/8
Schiller would have you sell the July 560 calls and
buy the July 565 calls. The net premium is 1 1/8
credit, which goes into your account. This spread
expires on July 17th. If the OEX is at or below 560
on that date, you get to keep the entire 1 1/8
premium received.
Schiller's probability model says that there is
a 95% probability that the OEX will be at or below
560 on July 17th, so there's a 95% probability that
you get to keep the entire 1 1/8 credit.
Just to horse around with arithmetic, let's do a VERY CRUDE
calculation of expectation on this position.
95% of the time, you win 1 1/8
5% of the time, you lose 3 7/8 (since the spread is 5 wide)
So your expected profit is: (0.95 * 1.125) + (0.05 * -3.875)
which is +0.875 ... 7/8ths. Neglecting commissions etc.
Your risk on this trade is 3 7/8 ($387.50) per contract.
Your expected profit is 7/8 ($87.50) per contract.
If you trade one contract for every $775 in your account,
as Schiller suggests, (he says don't put up more than 50%
of your capital for margin on any one trade), then on the
average you will make $87.50 profit for every $775 in the
account. That's a profit of 11.29 percent, in one month.
And you get to make this trade twelve times a year (once per
expiration month). So your expected annual growth rate is
261% per year.
Schiller deducts commissions (he assumes $7.50 per contract)
and he estimates the impact of the bid-ask spread, and he
assumes you'll get a net credit of 1 rather than 1 1/8 as
shown in this example. That's how he arrives at a figure of
"only" 100% per year.
That's his intermediate-term strategy. His short-term
strategy, and his profitibility estimates for it,
are REALLY surprising.
So, has anyone else read the book? Wanna exchange
opinions? email me please.
-Mark Johnson
janitor@xxxxxxxxxxxx
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