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Mike,
I can't agree with your lottery ticket analogy. Given $5,000 of which $500
is spent on a ticket, still leaves me with $4,500 uninvested, yet, I'd agree
with the fact that a vertical spread could result in the same outcome. But
my focus isn't on leveraging. My mandate as it were is to invest in
particular stocks.
I expect you'll interpret this response as yet another "change," but it
really isn't. My original email was to prove or disprove an assumption,
using TS. Not necessarily the merit of a collar, the benefits of leveraging,
and so on. They're all examples endeavoring to make a point. Admittedly I
asked for ideas and I appreciate your responses and point of view.
I know from several years of experience that hedging with collars
simultaneously addresses risk adequately and keeps the door open for a
satisfactory return. It's all but obvious to say that stocks do not increase
by the equivalent of a strike price or two above their price from one
options expiration date to the next, otherwise the outcome would be amazing
over a few years.
Using TS, I'd like to develop a system that demonstrates the above. I posted
some suggestions yesterday, which presumably you saw. I'd appreciate you
thoughts and insights about such a system. Pierre Orphelin responded to the
post saying that he'd written such a system 5 years ago and the cost was so
great that only a French Bank could have afforded to fund it, but he wasn't
at liberty to disclose the code, even if he had the time to do so! More
constructive comments would be much appreciated.
Colin West
-----Original Message-----
From: MikeSuesserott [mailto:MikeSuesserott@xxxxxxxxxxx]
Sent: Saturday, May 26, 2001 6:18 PM
To: caw; OmegaList@xxxxxxx Com
Subject: AW: need some ideas to (dis)prove an assumption
Colin,
to reiterate, this collar strategy of yours can be mildly described as
suboptimal.
Suppose you were about to buy a lottery ticket for the price of $ 5,000. How
would you like it if you learned that you could buy a ticket with precisely
the same risk/reward profile, same expiration, same odds, same potential
profit, same everything, for the price of only $ 500?
You can do exactly that in your collar strategy. As I had tried to point out
in a previous post, a collar is useful only if you *already* own some stock,
and want to protect it against a temporary market decline. Buying this stock
merely for the purpose of establishing a collar is amateurish and an
unnecessary expenditure. It is much cheaper to establish a vertical spread
which can be constructed to be *exactly* equivalent to the collar at a
fraction of the cost.
To illustrate, let us do your APC (Anadarko Petroleum) example at Friday's
closing prices. A collar could have been established by buying 100 APC,
selling 1 June 65 call, and buying 1 June 55 put, at a cost of about $
6,200.
However, you could have done an *exactly* equivalent position by selling 1
June 65 call and buying 1 June 55 call, at a cost of about $ 650.
Don't you think this difference might be worthy of your consideration?
Best wishes,
Michael Suesserott
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