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what do you think of putting some money into dow

  • Post #1
  • Quote
  • First Post: Feb 15, 2009 4:47pm Feb 15, 2009 4:47pm
Since dow is down about 2500 in the last 8 months or whatever its been wouldnt it be a good idea to put in a large buy for it right now since there is a very good chance that it will return to where it was eventually.
I hope this isn't another buy and hope strategy.

My suggestion would be to open an option straddle. Given the "change" which supposedly is coming with the Obama administration, I would expect a giant swing in the Dow.
Given the tightning range formation it's very likely we'll see a breakout soon.
ya like do ou think that there is actually a possibility that the dow wont be close to normal in at the latest the next 3 years.
Yes, there's a chance. I mean WTF is "normal" anyway?
Make sure you research politically correct companies that have strong lobbyists working with the Obama gang.
History is written by the victors.
Quoting dave08666
Since dow is down about 2500 in the last 8 months or whatever its been wouldnt it be a good idea to put in a large buy for it right now since there is a very good chance that it will return to where it was eventually.
YM has fallen 600 points in the week since you posted your "strategy"

let me know next time you're going to try to pick a bottom so i can take the opposite side of your trade.

picking a bottom in the YM/Es is a mugs' game at the moment imho, there is still plenty of room left to the downside
See why derivatives plays seem to be better now?

We can't predict direction too well at the moment, but we know what whatever happens, it's gonna be big.
Quote
See why derivatives plays seem to be better now?

On the long term time frame, yes. My concern tho was when I checked the option prices, the strike price already had a high implied volatility.
The Aussie ASX dropped from around 6500 to 3300, I'm waiting for it to recover at least one third before I buy some shares. Shares to me are a place to store cash, not to make big capital gains. This means I don't feel the need to try and pick a bottom nor will I feel that I've lost out if I miss a sudden rally.
Buying good quality top 20 companies and holding for years is my plan...

FX is where the cash will come from to buy these shares.
going long the dow using options would be silly, raygun, because uness you buy stuff that expires in a few years they will most likely expire worthless.

if you were to go long equities now i'd do it with a small non leveraged position that i am ready to keep for up to 6 years or so..
Quoting pippero
going long the dow using options would be silly, raygun, because uness you buy stuff that expires in a few years they will most likely expire worthless.

if you were to go long equities now i'd do it with a small non leveraged position that i am ready to keep for up to 6 years or so..

You don't buy long, you buy straddles.
Quoting Rabid
On the long term time frame, yes. My concern tho was when I checked the option prices, the strike price already had a high implied volatility.
True, depends on the contracts you are buying. Option pricing is still something I'm trying to perfect. But the math that I currently use is pretty simple.
  • Post #14
  • Quote
  • Edited 9:40am Feb 24, 2009 9:21am | Edited 9:40am
Quoting Ronald Raygun
You don't buy long, you buy straddles.
Too expensive to do this right now, due to the high implied vol and wide bid/offer spreads in the options market, both of which are rising as equities grind lower, due to an asymmetric relationship between implied vol and the directions of equities.

However, you could go for a cheaper strategy of a strangle, which is similar to straddle, in that you can go long vol (or vega) but the difference is this has two OTM strikes of similar deltas, instead of an ATM price.

Or you could buy a straddle for a near-dated expiry, say two months from now, and re-coup some of the high premium cost through selling a strangle for an expiry further out - if you believe vol is likely to fall after an near-term break to the downside. Also, you can hedge the expiry risk (delta) on the far dated structure through buying/selling futures contracts in the Dow, between now and the expiration date.
Clearly you know far more about options trading than I do gammase1.

I just calculate the profit I get when the price moves 5% away from the strike price, and I buy straddles which cost less than that profit.

Example:


Strike Price: $100.

For one contract...

If price goes to: $95.

  1. Call Profit: 0
  2. Put Profit: $500

If price goes to: $105

  1. Call Profit: $500
  2. Put Profit: 0

To me, I need to find a straddle which costs less than $500. If the price to open the straddle is less than $500, then I'll buy it.

Any suggestions for improvement?

Quoting Ronald Raygun
Clearly you know far more about options trading than I do gammase1.

I just calculate the profit I get when the price moves 5% away from the strike price, and I buy straddles which cost less than that profit.

Example:


Strike Price: $100.

For one contract...

If price goes to: $95.

  1. Call Profit: 0
  2. Put Profit: $500

If price goes to: $105

  1. Call Profit: $500
  2. Put Profit: 0

To me, I need to find a straddle which costs less than $500. If the price to open the straddle is less than $500, then I'll buy it....

Hi RR,

I only have live quotes on implied vol for currency options, so do not know today's levels for equity index option strategies. In recent months, I have been selling vol through FX option structures with a degree of success (through betting realised vol will be less than the implied level quoted by my bank). Although the bid/offer spreads is sometimes too wide that it is uneconomical for a small trader like myself to enter/exit efficiently.

You are right in trying to keep the structure straightforward, if possible. It makes it easier to hedge (if you choose to do so) and simpler to calculate the market value of the strcture. Personally, I like straddles, although I think you'll struggle to find any, where the cost of which are lower than your expectation of volatility for a given period (I could be wrong, often am!). What maturities are you thinking of?

Paul
I'm not trading Forex Options. I'm doing stock options. It's really the only way I can trade the stock market without using a bloomberg terminal. And even with a bloomberg terminal, I still have trouble making money on the stock market.

I'm looking at a maturity at least one year.

My thinking is that--since these are american-style options as opposed to European and Bermudan style options--the price should move at least 5% away from the strike price at least once in that period. I also increase my chances of hitting a winner by placing straddles on potentially newsworthy industries.

Example:

When Bear Stearns went under, guess what I did? I bought straddles against all of the other banks. So far, Lehman was a grand slam for me, so were fannie mae and freddie mac. They will all expire in June, and I'm sitting on upwards of 700% gains and they're still growing.

The Auto industry is also making some movement. Especially after the bailout.

Apple computer's stock usually makes a good move 2-3 days before a Macworld, or WWDC event.

Energy used to be a big thing when oil was $200/barrel

New products or drugs also are usually good especially when another company buys them.



As for industries I've dealt with:

  1. Auto
  2. Banking
  3. Alternative Energy
  4. Firms with New Patents
  5. Apple (Steve Jobs may be stepping down)
  6. Oil
  7. Energy
  8. Retail
  9. Pizza (Rising cheese costs)

All of those industries were in the news and very strong news events at one point or another. I have yet to have a losing straddle. But, I've only done 50 straddles thus far. Hardly a large enough sample size.

I agree that straddles which meet my criteria are difficult to find, but it's the exact same way with forex or any straight trading. The perfect entry point in forex is pretty rare, just as the perfect entry point in the stock options market is hard to come by.

I get the quotes in excel every 10 mins for stocks I'm watching with maturities between 12 and 18 months. After the market closes, I look at the news, any trends, historical volatility, and the cost of the straddle. If I think the price of the stock will move at least 5% within the maturity period, I'll buy. I usually get one signal every 3-4 days. So this isn't something which happens too often. But it makes a very good return.

Quoting Ronald Raygun
I'm not trading Forex Options. I'm doing stock options. It's really the only way I can trade the stock market without using a bloomberg terminal. And even with a bloomberg terminal, I still have trouble making money on the stock market.

I'm looking at a maturity at least one year.

My thinking is that--since these are american-style options as opposed to European and Bermudan style options--the price should move at least 5% away from the strike price at least once in that period. I also increase my chances of hitting a winner by placing straddles...
50 out of 50 winning straddles? That is a seriously impressive record, RR. Well done, friend, particularly on the home run you hit on the banking sector.
I used to work as an options (forex) market-maker for major house and nobody on my desk hit that kind of success with trades on their prop books.

Do you still find quotes for options costing less than 5% for a 12-18 month maturity???? If so, I'd buy massive quantities at that price.

Personally, I prefer European options, as they are cheaper. In the case of a straddle, if you purchased a 1y straddle at 15 vol (for example) and two weeks later the quoted vol for the same maturity was 18 vol, then you could simply close the structure out with equal and opposite positions sold at a higher premium price. Obviously, your p&l would be the positive vega, less time decay and less original premium costs.

With a straddle you should be just taking a view on changes in vol rather than size of move in the underlying - for this you are better just shorting the stock. But, with your 100% record of trading options, I would not attempt to tell you how to trade.
Can't argue with success, lol.

You're betting on uncertainty and the volatility it brings. As long as the market volatility exceeds the implied volatility, you're great.

You got any money on citigroup or bofa? All the talk of nationalization... either way, could be a big move. Mebbe straddle gold too.
I guess...

And I have no trouble finding option deals. I don't price them so that they are 5% of the specific price. I price them so that a 5% move of the underlying security is breakeven.

Yes, I've had money on Citi and BofA since about March. You should see the moves in Fannie Mae and Freddie Mac.

As for loading up on options, I still practice what I consider proper risk management. I try to trade so that I can lose at least 20 times in a row before I go broke.

When it comes what I should be looking for, I think we're saying more or less the same thing. Except you actually know the proper terms =D
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