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> This is a rather broad statement which I can not agree with
>entirely. There are stratagies using two products designed to limit risk.
To
>name one: a protected short sale.
>
> With this stratagy someone who is short a stock would purchase
a
>call on the stock at the same time. The theoretical risk of shorting a
stock
>is unlimited, but by owning a call at the same time the risk is limited to
a
>fixed amount (Harley take note). The formula for calculating risk is Risk
=
>Strike price of call + Call price - Stock price. Thus if the call
purchased
>was at the money the maximum risk would be the purchase price of the option
(+
>commissions).
> I do not trade futures but similar stratages might well work
in
>any market.
>
> Good luck and good trading,
> Ray Raffurty
Perhaps we can also think of the above statements in another way:
The markets fluctuate continuously - sometimes the fluctuations
move up - other times down, I'm not psychic enough to tell which way
either in the near or distant future, especially based on past movements.
I just know that they will fluctuate.
If I have an trading account and I willing to expose that account to
some risk for some future return, I could possibly make money
by chopping off some of the losing fluctuation before it gets too far,
and keep the profitable part of the fluctuation when it gives me
more profit. The casinos do the same thing. They set the wheels on
the slot machine so it gives them a 5%+ advantage. Sure they
experience drawdowns, but they know full well that they're going
to keep a nickel of every dollar bet. Ralph Vince says that with
their 5% edge, they have over a 100 standard deviation chance
of losing. Thats probably about the same chance as the Sun not
shining tomorrow. They just do they same thing over and over
again with discipline. As traders, we always trying to get some
perceived edge switching systems, piling drawdown upon draw-
down - eventually giving up.
Marrying a long option to a future, hard wires into your system,
a fixed risk. Over time, by knowing your exact risk, and moving your option
up with each improvement will eventually leave no risk to that position -
usually about three strike prices. This essentially riskless position can
then allow more risk to be assumed. The open
trade equity finances another bet on other peoples money all with
the same risk to your account as when you started.
With an option married to a future, when any crazy event comes
along that you cannot plan for, be it monetary meltdown in Asia, or
some idiot drilling into a sewer and flooding the Loop, you can sit
back and wait until the street dries out ( be it blood or water).
What do you think?
Blissfully,
Ted
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