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It always amazes me when people talk about options and the buying of puts to protect a position or at least create a safety net as a bad idea.
You take out fire insurance on your house, but you don't expect a fire. You have auto insurance, yet you don't expect to have an accident. There is flood insurance and no expectation of a flood. There is life insurance and health insurance and you expect to die or have a major illness yet you spend thousands of dollars to protect you from a one in a million chance of one of these occurrences happening.
When it comes to cold hard cash that you have at risk and a 1 in 3 chance of losing there is always that one person saying that it is speculative an risky. How many times has your other insurances expired worthless? Why do you renew every year if you know that nothing is going to happen and your insurance is going to expire worthless.
You can say the same thing about calls. Why invest and take $50/share risk or a round lot risk of $5000 when for $200 or $300 you can have the exact same exposure and your $5000 is safe and earning interest. There are multiple ways of looking at any problem and there is always a justification for whatever position that you take. Here is just one man's opinion who has used options for almost every purpose imaginable.
Ira
----- Original Message -----
From: Mark Simms
To: realtraders@xxxxxxxxxxxxxxx
Sent: Tuesday, February 13, 2007 11:40 AM
Subject: RE: [RT] google
RE: Options are best used as tools not for speculation
Ray - with all due respect, those calendar spreads you put on were not without risk, so by my definition,
those positions were speculative.
I agree however, that your recommended strategy for your friend employed options as a tool.
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From: realtraders@xxxxxxxxxxxxxxx [mailto:realtraders@xxxxxxxxxxxxxxx] On Behalf Of Raymond R. Raffurty
Sent: Tuesday, February 13, 2007 1:35 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: RE: [RT] google
A few years ago a friend asked me to advise him about a position he was holding. He had retired as an executive of a large insurance company and over the years he had acquired a very large stock position in the company at a very low average basis ($15 or $20). As I recall it was trading at about 120 at the time.
His concern was that the stock would decline but did not want to sell the stock for tax reasons. Based on his long experience with the company I believed him. My advise to him was to buy leap puts (100 or 110's) to protect the down side for a long time and to sell out of the money calls (130's, 2 or 3 months out) to partially defer the cost.
I explained that if he was correct the puts would act as an insurance policy and the short-term calls would expire out of the money and he would keep both the stock and the money from them while the puts would go in the money and cover the decline in the stock. If he was wrong and the stock went above the call's strike he could roll up to a higher strike and out in time for a small loss (if any) and stay in the position until the stock turned down.
Based on his knowledge and further research I set up similar calendar spreads for myself and sure enough 5 months later the stock was trading between $40 & 50. I called him to thank him for the tip and ask if he thought the stock would go much lower (I was still long the puts). He said, "I don't want to talk about it!" After some prodding he confessed that he had not taken my advice because his broker told him "Most options expire out of the money" and "Most people lose money with options".
I had made a very safe trade and my largest single position profit ever while his net worth had been cut in half. He then said he thought the worst was over and while he didn't see much up side for the stock he felt that it would not go any lower and that it would probably take years for him to recover.
"Perfect" I replied "sell 50 or 55 strike calls against a small portion, 10-20%, of your stock (covered calls) and use the proceeds to diversify you portfolio". This time he took my advice and has been rebuilding his portfolio while the stock has traded sideways to slightly up.
Options are best used as tools not for speculation.
Good luck and good trading,
Ray Raffurty
-----Original Message-----
From: realtraders@xxxxxxxxxxxxxxx [mailto:realtraders@xxxxxxxxxxxxxxx]On Behalf Of Mark Simms
Sent: Monday, February 12, 2007 10:33 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: RE: [RT] google
re: Why do the spreads instead of just being naked short?
Of course, just ask Vic Niederhoffer !
However, back then, the VIX was much higher...
BUT..today, with VIX near ALL TIME LOWS, some players are probably thinking naked shorts are not that risky.
Hello Vic, are you there ?
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From: realtraders@xxxxxxxxxxxxxxx [mailto:realtraders@xxxxxxxxxxxxxxx] On Behalf Of Ira
Sent: Monday, February 12, 2007 5:57 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: Re: [RT] google
I traded options as a market maker and traded my own money. There is a difference between that and trading for someone else. I was able to retire in 1985, so I do know about options trading.
By definition the majority of the options will go out worthless. All the calls above the expiration price and all the puts below the expiration price go out worthless. Because my options went out worthless doesn't mean that I lost money.
An example. Say the greater fool theory works and GOOG looks like it should go out at 460+/-. If I sell the 440/450 put spread for 1.25 credit and the 480/470 call spread for a 90 cent credit I have a total credit of 2.15, These are prices that are currently doable. If GOOG goes out on expiration day between 250 and 270 I get the credit. Guess what My long options would go out worthless. Did I lose money on the positions. No. what it did allow for was a limited risk and limited margin. Margin is only applicable to one side. The side with the greatest risk. In this case the call side. doWhy the spreads instead of just being naked short? Ask those traders that lost millions in 1987 why you shouldn't do that.
Ira
www.thetradersguide.net
----- Original Message -----
From: Ben
To: realtraders@xxxxxxxxxxxxxxx
Sent: Monday, February 12, 2007 2:24 PM
Subject: Re: [RT] google
most people who just buy options wind up loosing money
cboe statistics says 80%
there are however ways to still makes money with options
and
the more you read ,the more the uneducated gets confused,
the hard thing for most people, Is to understand , how, when the stock moves, up or down, it effect their position,
example
say you are bullish in xyz stock
the stock is at 30
you buy July 35 calls
sell June 40 calls and sell July 25 put
buy 20 put, this is even with credit that added money to your account!!
this is a win if it goes down and win if it goes up,
the problem comes when you need to REPAIR the position
say the stock drops to 25,
now you are a loosing on your short 25 put
and loosing on your long 35 calls
also
making money on your 20 put and on your short 40 calls
did one compensate for each other? sometimes yes and sometimes no
there is MUCH more then meets the eye in options
and after 30 years I am still in first grade
Ben
----- Original Message -----
From: Ira
To: realtraders@xxxxxxxxxxxxxxx
Sent: Monday, February 12, 2007 4:58 PM
Subject: Re: [RT] google
Depends for what reason you hold long options for long periods as they can be the road to riches. It is always the voice of the uneducated that comes up with these sayings.
Ira
www.thetradersguide.net
----- Original Message -----
From: Mark Simms
To: realtraders@xxxxxxxxxxxxxxx
Sent: Monday, February 12, 2007 1:32 PM
Subject: RE: [RT] google
Of course. Any "fool" would have sold them already for a huge profit.
A Chinese philosopher and trader once said: "Holding long options for long period of time = path to poor house"
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From: realtraders@xxxxxxxxxxxxxxx [mailto:realtraders@xxxxxxxxxxxxxxx] On Behalf Of Ira
Sent: Monday, February 12, 2007 1:48 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: Re: [RT] google
As of Sunday the greater fool theory says 460+/- on expiration, unless there is a great shift in open interest.
Ira
www.thetradersguide.net
----- Original Message -----
From: Mark Simms
To: realtraders@xxxxxxxxxxxxxxx
Sent: Monday, February 12, 2007 9:39 AM
Subject: RE: [RT] google
Funny, but Guy Adami on CNBC's "Fast Money" called it right with a rec for GOOG 450 puts 2 weeks ago.
March expiration I believe.
Great call.
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From: realtraders@xxxxxxxxxxxxxxx [mailto:realtraders@xxxxxxxxxxxxxxx] On Behalf Of Ira
Sent: Sunday, February 11, 2007 6:21 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: Re: [RT] google
Sorry the target number is 452.88 with interim support at 454.39. I have numbers all the way down to 434. With the downside pressure so over extended I doublt that it will go much further without a pause.
Ira
www.thetradersguide.net
----- Original Message -----
From: Ira
To: realtraders@xxxxxxxxxxxxxxx
Sent: Sunday, February 11, 2007 10:00 AM
Subject: Re: [RT] google
If you are correct why not just buy 20 of the 470 calls at 11.80 the current offer. They have a theoretical value of 14.69 with a delta of 45
. For $2360 you can control about 100 shares until March. With Expiration Friday you could sell the Feb 470 calls for 2.70 to reduce your cost and if price rallies into Friday the spread will increase in value. Greater fool theory seems to indicate that GOOG should go out at about 460.
If I remember correctly I have a projected low on the stock of 458. I will have to check that later.
Just one mans opinion. Ira.
----- Original Message -----
From: Ben
To: astrofin@xxxxxxxxxxxxxxx ; ntt-list@xxxxxxxxxxxxxxx ; realtraders@xxxxxxxxxxxxxxx
Cc: vincent
Sent: Sunday, February 11, 2007 9:28 AM
Subject: [RT] google
is it time to buy
you say you can not afford it too expensive to trade,,, WRONG
just trade 50 shares
say you bought 50 at 461 your total output $23050 plus comm
if it only go up to 471 you made 500 minus comm
you put stop loss at 456 or just $5
long term trading suggests we are near a bottom
see gif
right way to trade it
After it makes a lower low on monday you watch it climb
you put a buy stop at $5 above the mondays low
stop loss is mondays low
real objective is about 475-485
Ben
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