|
PureBytes Links
Trading Reference Links
|
Mike,
It isn't my intention to intentionally change the initial proposition! It
simply evolves as respective interpretations eventually reach a common
understanding. Winston Churchill got it right. We're divided by a common
language.
Here's an example of one of today's trades. I bought APC at $63.50, sold a
Jul 70 call for $1.80 and bought a Jun 60 put for $1.25. (Not surprisingly
I'm a little underwater at the moment excluding commissions). The decision
to buy APC was based on its fundamentals, but that's another story.
At each option expiration date, if the sold call isn't assigned, I'll reset
the collar for as long as I hold the stock. If I'm assigned, then my return
is satisfactory (to me at least). It's a little better than a 1:2
risk:reward. If APC falls below the strike price of the put, then I'll
reassess the position at the next expiration date. This strategy has worked
well over the long haul, particularly as it quantifies risk and ensures
acceptance of my demeanor in the local community. BTW, I have acquaintances
who wished they'd put a collar around their stocks a year ago!
Let's say it's my assumption, although I believe it's shared by many, that
the price of a stock infrequently rises by more than the difference between
the price of a sold call at one strike above the money and the price at
which the stock was purchased, within 30 days of purchasing the stock or
until the time of the nearest option expiration. In the above example, its
two strikes above the money. What I'm endeavoring to discover is the degree
of merit of the assumption, and interpret it in a (TS) system.
Colin
this "assumption" of yours is a strange beast for sure, because,
chameleon-like, it seems to change its color with each new post. First it
was about the time decay of options, then about the behavior of a collar,
and now the topic is the volatility of stocks. Granted that there is a
connection between all of them, yet these problems do differ from a
theoretical viewpoint, as well as in practical application.
Be this as it may, here is a rough-and-ready test of the assumption below
which is relatively straightforward; a simple spreadsheet should suffice.
Load a stock's daily OHLC historical data for as far back as you care to do
your test. For every day during this period have the program check whether
the MaxHigh of the next 30 days was greater than today's price plus strike
distance, or not; and do the same for the downside. You have to take into
account the different strike distances that vary with the price of the
stock. Count the number of yeas (strike was exceeded above or below) vs. the
number of nays for this stock, and it should give you a good first
impression. You might do this for a universe of stocks such as the SP500,
and calculate an average.
Of course, this primitive method can be much refined with all the weapons of
descriptive statistics at your disposal, but I won't go into that here.
Hope this helps, and I have correctly understood your assumption this time.
Best,
Michael Suesserott
-----Ursprüngliche Nachricht-----
Von: cwest@xxxxxxxxxxxx [mailto:cwest@xxxxxxxxxxxx]
Gesendet: Thursday, May 24, 2001 22:47
An: Omegalist
Betreff: RE: need some ideas to (dis)prove an assumption
Mike,
I appreciate your input, and believe I clearly understand it, but the
essence of what I'm attempting to (dis)prove is an assertion that stocks
infrequently rise by more than the equivalent of one strike above their
price within 30 days. That is, on 4/23 the price of a stock was say $50, and
by 5/18 it was less than $55.
|