4 ms·

There are some people doing it right, though. Check out TastyTrade.com. Your solution for retail investors who are getting burned in high beta tech stocks is t

by minimax 12y ago

There are some people doing it right, though. Check out TastyTrade.com. Your solution for retail investors who are getting burned in high beta tech stocks is to go put on a bunch of complicated options positions? That seems like kind of crazy advice. Maybe just buy some SPY and go do something more interesting than stare at options prices all day.

encoderer 12y ago
Sure, you can buy an index and forget it. Or, you can buy the index and then sell a covered call on it every month at 1 standard deviation out of the money. You decrease your basis and earn a monthly income, at the risk only of capping your upside if SPY surged upward. One sd out of the money options will expire worthless 85% of the time. No "staring at prices" required. It's not your fault if you're scared of options (or scared for the masses). It's because retail investing has been taught and presented totally backwards for 20 years. Options have the same risk as the underlying. They are only more dangerous because they give you leverage. So you trade 1 lots or 2 lots. Your capital at risk in my apple spread example is an order of magnitude less than buying even 10 shares of Apple stock at the then price of 5000+ The retail investor understands rankings and price targets and no load mutual funds and other things we've said are I,portamt. I can teach you vertical spreads in a few hours and that is all you need to use options in your investment strategy. In a vertical spread I can tell you with certainty that your probability of profit is equal to the max loss divided by the width of the strikes. Max loss is the width of the strikes less the credit you received when you sold the spread. So if you sell the 190-189 put spread on the spy bc you think it will go up, and you receive .35 for the trade, your Max loss is .65 so your probability of success is .65/1=65%. Whether or not that's a good risk to take depends but it's better than buying Netflix because some guy on tv invents a price target.
- jcdavis 12y ago
  1 or 2 lots? The margins after commissions are going to be crap (if anything) for big indexes. I know the phrase "efficient market" gets thrown a lot but its pretty relevant here - there simply isn't much, if at all, to be made doing this. Lets say you have 100 shares of SPY - $19.6k. You propose what - Writing Nov 22 calls? Look at the chain - $0.31 bid for 204, for instance, which is pretty high-risk already, but 205 is to $0.23, 206 down to $0.15. You can even find an index that does this for you - http://www.cboe.com/micro/bxm/ http://www.cboe.com/micro/bxm/ . I'll save you the looking, but it underperforms SPY at 1,5,10 years + inception. Options are valuable tools for certain situations, but average investors shouldn't touch them with a 10 foot pole.
  - encoderer 12y ago
    It seems you're arguing theoretically, and that maybe I moved a little too quick in my previous post and wasn't clear. What I actually suggested above was buying the SPYs and selling covered calls. The only risk you're taking on is limiting your upside to your strike price. Tell me this: what can an investor do to increase his probability of success in a trade other than reducing basis? The argument for reducing basis is simple: Reducing the amount you've paid for the shares, making them cheaper for you than somebody just buying the stock, gives you an edge. The monthly sd in SPY is $9. So yes, if you sell the $205s, 85% of the time the calls you sell will expire worthless OTM, and when that happens if you roll your position forward another month, doing that will increase your total profit over just holding the stock. Limiting upside to increase odds of profitability is the lynchpin of professional trading strategies. And that's what you're doing here. And yes, selling 1 and 2 lots, commissions do absorb a larger percentage of your PL than on bigger transactions. And complex strategies that require 4 legs like an Iron Condor won't be profitable at that size, it also happens that an IC is a low-risk strategy (and thus small effect on your buying power) so in those cases you can increase the leverage or widen the strikes. Your attitude about options is understandable given the way they've been portrayed to the retail investor. And everybody should think about what's right for them. But most retail investors buying stock, making directional bets, buying netflix at $500 a share, you think that's less risky than buying a $100 debit spread on NFLX with a higher probability of success and massively less capital. And you think that way because it's how you and the retail sector has been conditioned for 20 years. And, like I said up top here, the retail sector has underperformed the market. And it's not because of evil HFT firms who do nothing but cheapen transaction costs for everybody. It's because of the way we trade. It can be better. Check out this TastyTrade video covering a study they've done on reducing cost basis with covered calls: http://www.tastytrade.com/tt/shows/market-measures/episodes/cost-basis-reduction-probabilities-05-06-2013?utm_campaign=learn&utm_medium=link&utm_source=social-share http://www.tastytrade.com/tt/shows/market-measures/episodes/...
- drglitch 12y ago
  > Options have the same risk as the underlying. Not really. Option pricing includes volatility (beta) and time-decay (theta) in addition to basic price sensitivity (delta). In plain english, an option has a premium not just based on how far from the money (from current price) the strike is but also how much underlying is moving AND how far away option expiry is. Vol moves are not to be underestimated - if you look at option prices within a buck or two of Intel when they announced earnings, you'll see how implied vol changed. Lastly, I believe options are too complex for retail, non-active investor to grasp not because of needing to buy 4 legs to form an iron condor or something, but from fact that there are inherently more built-in risks that are very hard to understand, vs simple "company does good, it goes up, company does bad, it goes down" proposition of a stock. Lastly, i do agree with you that options present a very good set of tools, but like with any power-tool, you should know what you're doing before pressing that "on" button :)
  - encoderer 12y ago
    You're missing an important fine point here: I am not advocating buying options. These strategies are selling options. So implied volatility and theta decay are your very best friends. This "options are too complex" language is just silly. Retail investing doesn't work as it's been taught! It underperforms the market and professional investors, and it doesn't have to. You don't have to run complex positions, selling a vertical spread is every bit as easy as buying stock (one transaction to open the position, one to close it, and sometimes you don't need to close it.) Anybody who wants to tell me options are risky has to explain this: Suppose you want to capture upside in, say, Amazon. Why is it riskier to sell a put spread or buy a call spread, in either case risking just a few hundred dollars, than it is to buy shares when just 25 will cost you $7500 or more? The fact that you mistook the value of theta decay and IV in my proposed scenario of selling a covered call makes me think you just don't understand some of these things. And that's not your fault, it's a huge fail IMO that the retail investor has had to learn the finer points of front load vs back load on some overpriced mutual fund but has been taught that options are scary. Again, I do not advocate for taking long option positions and I definitely think you should check out TastyTrade.com to learn a bit more about the philosophy.

by minimax 12y ago

encoderer 12y ago

Sure, you can buy an index and forget it. Or, you can buy the index and then sell a covered call on it every month at 1 standard deviation out of the money. You decrease your basis and earn a monthly income, at the risk only of capping your upside if SPY surged upward. One sd out of the money options will expire worthless 85% of the time. No "staring at prices" required. It's not your fault if you're scared of options (or scared for the masses). It's because retail investing has been taught and presented totally backwards for 20 years. Options have the same risk as the underlying. They are only more dangerous because they give you leverage. So you trade 1 lots or 2 lots. Your capital at risk in my apple spread example is an order of magnitude less than buying even 10 shares of Apple stock at the then price of 5000+ The retail investor understands rankings and price targets and no load mutual funds and other things we've said are I,portamt. I can teach you vertical spreads in a few hours and that is all you need to use options in your investment strategy. In a vertical spread I can tell you with certainty that your probability of profit is equal to the max loss divided by the width of the strikes. Max loss is the width of the strikes less the credit you received when you sold the spread. So if you sell the 190-189 put spread on the spy bc you think it will go up, and you receive .35 for the trade, your Max loss is .65 so your probability of success is .65/1=65%. Whether or not that's a good risk to take depends but it's better than buying Netflix because some guy on tv invents a price target.

jcdavis 12y ago
1 or 2 lots? The margins after commissions are going to be crap (if anything) for big indexes. I know the phrase "efficient market" gets thrown a lot but its pretty relevant here - there simply isn't much, if at all, to be made doing this. Lets say you have 100 shares of SPY - $19.6k. You propose what - Writing Nov 22 calls? Look at the chain - $0.31 bid for 204, for instance, which is pretty high-risk already, but 205 is to $0.23, 206 down to $0.15. You can even find an index that does this for you - http://www.cboe.com/micro/bxm/ http://www.cboe.com/micro/bxm/ . I'll save you the looking, but it underperforms SPY at 1,5,10 years + inception. Options are valuable tools for certain situations, but average investors shouldn't touch them with a 10 foot pole.
- encoderer 12y ago
  It seems you're arguing theoretically, and that maybe I moved a little too quick in my previous post and wasn't clear. What I actually suggested above was buying the SPYs and selling covered calls. The only risk you're taking on is limiting your upside to your strike price. Tell me this: what can an investor do to increase his probability of success in a trade other than reducing basis? The argument for reducing basis is simple: Reducing the amount you've paid for the shares, making them cheaper for you than somebody just buying the stock, gives you an edge. The monthly sd in SPY is $9. So yes, if you sell the $205s, 85% of the time the calls you sell will expire worthless OTM, and when that happens if you roll your position forward another month, doing that will increase your total profit over just holding the stock. Limiting upside to increase odds of profitability is the lynchpin of professional trading strategies. And that's what you're doing here. And yes, selling 1 and 2 lots, commissions do absorb a larger percentage of your PL than on bigger transactions. And complex strategies that require 4 legs like an Iron Condor won't be profitable at that size, it also happens that an IC is a low-risk strategy (and thus small effect on your buying power) so in those cases you can increase the leverage or widen the strikes. Your attitude about options is understandable given the way they've been portrayed to the retail investor. And everybody should think about what's right for them. But most retail investors buying stock, making directional bets, buying netflix at $500 a share, you think that's less risky than buying a $100 debit spread on NFLX with a higher probability of success and massively less capital. And you think that way because it's how you and the retail sector has been conditioned for 20 years. And, like I said up top here, the retail sector has underperformed the market. And it's not because of evil HFT firms who do nothing but cheapen transaction costs for everybody. It's because of the way we trade. It can be better. Check out this TastyTrade video covering a study they've done on reducing cost basis with covered calls: http://www.tastytrade.com/tt/shows/market-measures/episodes/cost-basis-reduction-probabilities-05-06-2013?utm_campaign=learn&utm_medium=link&utm_source=social-share http://www.tastytrade.com/tt/shows/market-measures/episodes/...
drglitch 12y ago
> Options have the same risk as the underlying. Not really. Option pricing includes volatility (beta) and time-decay (theta) in addition to basic price sensitivity (delta). In plain english, an option has a premium not just based on how far from the money (from current price) the strike is but also how much underlying is moving AND how far away option expiry is. Vol moves are not to be underestimated - if you look at option prices within a buck or two of Intel when they announced earnings, you'll see how implied vol changed. Lastly, I believe options are too complex for retail, non-active investor to grasp not because of needing to buy 4 legs to form an iron condor or something, but from fact that there are inherently more built-in risks that are very hard to understand, vs simple "company does good, it goes up, company does bad, it goes down" proposition of a stock. Lastly, i do agree with you that options present a very good set of tools, but like with any power-tool, you should know what you're doing before pressing that "on" button :)
- encoderer 12y ago
  You're missing an important fine point here: I am not advocating buying options. These strategies are selling options. So implied volatility and theta decay are your very best friends. This "options are too complex" language is just silly. Retail investing doesn't work as it's been taught! It underperforms the market and professional investors, and it doesn't have to. You don't have to run complex positions, selling a vertical spread is every bit as easy as buying stock (one transaction to open the position, one to close it, and sometimes you don't need to close it.) Anybody who wants to tell me options are risky has to explain this: Suppose you want to capture upside in, say, Amazon. Why is it riskier to sell a put spread or buy a call spread, in either case risking just a few hundred dollars, than it is to buy shares when just 25 will cost you $7500 or more? The fact that you mistook the value of theta decay and IV in my proposed scenario of selling a covered call makes me think you just don't understand some of these things. And that's not your fault, it's a huge fail IMO that the retail investor has had to learn the finer points of front load vs back load on some overpriced mutual fund but has been taught that options are scary. Again, I do not advocate for taking long option positions and I definitely think you should check out TastyTrade.com to learn a bit more about the philosophy.