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Thanks Ira. I understand all that, I am a professional in derivatives, and have worked
in about all possible positions in this business for many years now, and even if not for
as long as you yet, I also grew up with stocks and options in particular from kid on.
Options do not create value anyhow, they just transfer your risk, at a cost. For
privates this comes at a (very) high transaction cost, which you might just as well
reduce by simply using stops on the underlying... (as in your example below: why bother
doing something complicated when you can do much more simple and cheaper? In essence you
sell short and put in a stop!)
The notion of "I have limited risk" is the biggest options trader killer I know besides
"going naked small premium". Because one forgets to see that the hit ratio rarelly
improves past 20% on such strategies. Limited risk with 80% losing trades, that implies
huge winners to break even which do happen, but most will not let them run far enough,
thus never really collecting and going bankrupt in the end. I have seen and sometimes
tasted myself dozens of blow ups this way, from privates, market makers, small
institutions, large institutions, options specialists, hedge funds, really bright minds,
and exceptional traders. This is one tough game, I just can't recommand safely, and I
can only stress anyone not experienced to be VERY cautious, and to play only with
"casino" money.
As for the games of trying to play gamma or volatility, even as an institution with very
large exposure we have lots of work to keep our initial margins on our trades. Options
price in most of the intraday volatility already. Non seasoned privates have just no
chance at this game.
Gwenn
Ira Tunik wrote:
> There seems to be a disagreement about who is making money in options who isn't. If
> I am long the 50 call and short the stock at 48. I have limited risk. I have
> created a synthetic put. I have the ability to trade the stock against that option
> with a defined risk. If I am wrong, then I know exactly what I can lose. If I am
> right, I will make the money on the short less the call cost. At 30 I really don't
> care that the option went out worthless. Now someone will say, "you reduced your
> profit by the cost of the option". I say, "I don't have to wait for my house to
> burn down to consider fire insurance". Because an option goes out worthless does
> not mean that the holder lost money. In options and option trading, everyone can
> make money if they know what they are doing. Both option seller and option buyer.
> The greater looser is often the option writer, the covered call. That party has
> limited his/her profit and has unlimited loss (the value of the underlying). I can
> name dozens of stocks that have gone to zero. I don't know of any that have gone to
> infinity. Look at the current situation. There are many stocks that traded between
> 100 and 360 that are now trading between 20 and 60 and the drop occurred in a
> hurry, and not through a split. In my previous post you will note that I used the
> terms, knowledge, professional and understanding. For those who believe that all
> option buyers are losers, you need an education. For those who believe that
> options sellers make the big profits, look at the strategy called for just months
> ago. Sell the puts and generate a good income and great profits. I know that at
> the time of sale you said that you would love to own the underlying at that price,
> Now with many of those items far below the put strike price, it doesn't look like
> such a good idea. Like any professional, whether it be a carpenter, plumber,
> doctor, engineer or another trade, profession or discipline, you have to know how to
> use the tools of that trade to be a success. Trading is no different. Learn how to
> use options, futures, stock, indexes, technical and fundamental analysis and any
> other derivatives or techniques that will assist you in becoming a better trader.
> Ira
>
> Gwenael Gautier wrote:
>
> > I wouldn't advise options to anyone not trading full time profitably since a
> > number of years. The number of people making money there in the long run,
> > including professionals is amazingly small. Buying options is almost a sure
> > receipe for bankrupcy medium term if you don't know how to trade the cash first.
> > Selling options is a sure receipe for bankrupcy if you don't know how to make
> > money buying them first...
> >
> > In a word, I can only advise the average trader investor to stick to his cash
> > positions, eventually write calls on these etc, but don't start trying to time
> > anything with puts, calls, warrants etc, this will bring lots of sorrow and you
> > won't even understand what happened.
> >
> > Gwenn
> >
> > Ira Tunik wrote:
> >
> > > It is not pitting ones own belief and ego against the markets. It is
> > > utilizing ones skill and knowledge of the business of tradign that counts.
> > > As I have said many times, knowledge is power, and the proper use of it will
> > > give success. You can make more money, in a shorter period of time, in a
> > > bear market or falling market then you can in a bull market. The key is
> > > knowing how to do it with limited risk. Try utilizing options in your
> > > strategy and you will find that the risk is less then owning stock alone in
> > > a bull market. Even with the disaster in the NASDAQ, you haven't made a 2/3
> > > retracement of the 98 low. Therefore, technically, according to some
> > > theories, you are still in the bull phase. I have support at 3000 to 3030
> > > and we hit within 12 points during the week of the 26th of May. I am not
> > > saying that we are in for another bull market, but if this is a bear, bear
> > > market rallies can tear the shorts apart. These rallies are short, they are
> > > violent, and they stop when least expected. So if you are short, CYA. If
> > > 3000 doesn't hold, 2550 is next. Risk is a function of money management.
> > > Understanding the tools that you have to manage risk and still allow for
> > > unlimited profit is part of being a professional. Good luck in either
> > > market direction. Ira
> > >
> > > Gwenael Gautier wrote:
> > >
> > > > Investing in solid, well managed companies dominating their sector,
> > > > itself in a strong growing trend within a growing economy in a peaceful
> > > > world may not be the absolute certainty for profits always, but long
> > > > term you will not lose much doing so, while trying to time a bear market
> > > > in and as out is like trying to figure out how far a dog will run back
> > > > and forth and how long before it comes back to you. YOU WILL NEVER KNOW
> > > > BEFORE, AND THAT IS A TRULY LOSING AND EXPENSIVE METHOD. Besides,
> > > > selling short you may lose more than your equity, that is not a prudent
> > > > thing to do....
> > > >
> > > > I can only warn anyone from trying to pit one's ego or own beliefs
> > > > against the markets. That is definitely a most effective way to get
> > > > seperated from one's money real fast and brutally.
> > > >
> > > > Gwenn
> > > >
> > > > James Taylor wrote:
> > > >
> > > > > When the water level falls, all boats go lower.
> > > > >
> > > > > Hunting and hoping to find stocks that will go up in the face of
> > > > > a bear market is a recipe for losses.
> > > > >
> > > > > You should be searching for the best short sale candidates.
> > > > >
> > > > > Best of luck buying in this market.
> > > > >
> > > > > JT
> > > > >
> > > > > ----- Original Message -----
> > > > > From: "John Corrion" <corrion@xxxxxxxx>
> > > > > To: <realtraders@xxxxxxxxxxxxxxx>; <AIQ-Trading@xxxxxxxxxxx>
> > > > > Sent: Friday, May 26, 2000 6:46 PM
> > > > > Subject: [RT] Sector Rotation
> > > > >
> > > > > > Hi Guys,
> > > > > >
> > > > > > Anybody having any success determining the sectors that
> > > > > > may be up in the next rally? I have heard that
> > > > > > Fidelity is concentrating on wireless companies, is
> > > > > > there a list of these companies?
> > > > > >
> > > > > > Everything I see basing tends to be defensive and not
> > > > > > prone to great price appreciation.
> > > > > >
> > > > > > Thanks,
> > > > > >
> > > > > > John
> > > > > >
> > > > > >
> > > > > >
> > > > > >
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