Just a little political cartoon I thought I would post. Check it out here. Very funny.
Alright lets start with part 1. What happens to options contracts? According to the CBOT clearing house: 17% are exercised, 35% expire worthless, and 48% are bought or sold to close the position. From this the majority of options are sucker bets, at least a 35% are expired worthless, and only 17% of the time you will get called for the stock or have it put to you. This tells me that is better to be on the sell side than the buy side. Options are like cars, they are depreciating assets. Let that work in your favor. The rate of decay of an option is called Theta (note this for later). Any experienced options trader knows that the real money is made on the sell side not the buy side.
But with options you cannot expect to be right every time, maybe there are people that can but I can’t, I’m not that smart. There are so many factors that affect the market. Always live to trade another day is what you always keep in mind. It is very unlikely that somebody can predict where the market is going to go. The market is going to do what the market is going to do no matter how I feel and there are so many variables that go into that question. Yes I speculate but ultimately Mr. Market could care less about how I feel. I can give a pretty good idea of how a company is going to do over a period of time, if the company does well the stock eventually follows. - Peter Lynch. Lets take a strategy I am using right now. I am bullish on CSCO and INTC stock over the next couple of years.
Lets take a look at a basic options strategy which is systematic writing. Were just gonna discuss writing puts here.
Say I am willing to be long 2000 shares of CSCO, I am bullish long term 3 - 5 years. CSCO is a very liquid stock and has very liquid options. CSCO closed at 23.60 on Friday, with volume of 50 million. I usually like to write 2 months out. It is usual to see the most daily option volume on the at the money strikes (ATM). This is the strike closest to the spot price of the security. Hence most of the heavy volume is at the 22.5 Strikes and some large volume at the 25 calls. [more]
Must Read Article. On Mises.
I think I might do a series on options without much of the mathematics, well I will introduce some basic concepts. For some reason I have always been intrigued by options and how they work, how they are priced and the advantages they have. Throughout the past 2 years while studying options I have got to know a group of CBOT market makers and floor traders who have helped me with what to read and explaining the business of options to me. Options are amazing because:
"They increase the number of ways this investor can manage his financial assets by giving him or her the power to create positions that precisely reflect his expectations of the underlying security and, at the same time, balance his risk-reward tolerance. This means that options increase control over financial assets by providing alternatives that were unavailable in the past (1991)." - Cox
A former CBOT trader told me for most people "options are sucker bets." I don't place many options bets but when I do play with options I am not in the business of being the sucker. I am in the business of making money. Why play a game where I am going to be at a disadvantage?
This series is going to cover the basics of option trading different strategies, some statistics to put the odds in your favor and how to not make sucker bets. [more]
As of Friday I am officially done with high school. Thank God.. Now time to move on to bigger and better things in college.....
Some News for today that I posted in my blog.
The Volatility Soma
Check out the Washington Post article here.
I was browing my Itunes a second ago and thought that sometimes markets can be like the Rage Against the Machine Song "Bull's on Parade"
CPI up and housing starts down. This is not going to look good on Bernakes part with the CPI numbers that came out this morning. The Futures are already expecting a nasty opening lets see what happens.
Today I have been managing my inventory of caps and making some corrections, MOS looks like it is getting into overbought territory based this signal has hit several times and the prices has continued to trend up. Something I am adding tommrrow is BRCM - Broadcom has signed an agreement with Microsoft to supply IPTV controller chips for the Microsoft TV (MSTV) platform. - MACD bearish crossover check before getting in traded on the low side of 50 RSI, currently 30 see if it makes a break for the upward movement.
Also I am adding SVNT as the green thumb [more]
WTF TMF I entered my picks at 2:48 - 2:50 and they are still under "pending" it is 4:16.
It is located on pg. 14 here. Interesting but scarey at the same time.
My mom sent this to me this morning. Very Funny.
There is only one way to describe the past couple of weeks: Europe is starting to feel the bite too! January and February so far have been the bearers of much bad news for the Euro area with a wave of bad data including lower Industrial output, a narrow Trade surplus, weaker economic confidence and PMI indicators, all suggesting a slowdown could materialize by H2. There is also the prospect of a US recession and the Euro area unlikely to escape unscathed by it. On top of everything, inflation is currently at 4.2% in Spain, 3.1% in Italy, 3.0% in Germany and it hit 3.2% for the whole of the Euro area.
Given the economic background we largely expected the ECB to stay on hold but for its tone to move to neutral from strongly hawkish in January. This way it is preparing its path for monetary policy loosening to start in line with our forecast that it will start to cut rates by late spring in the face of serious downside risks to growth from both domestic and foreign developments.
The BOE cut rates by 25bps to respond to deteriorations in the growth outlook. Its statement was largely balanced. By highlighting that growth is slowing and downside risks come from foreign and domestic developments opens the way to further cuts. On the flip side, the stress on inflation pressures and the need for further easing in growth to keep it subdue signals that they will take a gradual approach with the next cut possibly by April.
Worldwide Announced M&A Fees Year-To-Date
Rank Firm ($Mil) Number of Deals
1 Merrill Lynch 153.52 25
2 Lehman Brothers 151.29 13
3 JP Morgan 111.28 25
4 Citi 110.34 18
5 Goldman Sachs & Co 110.22 21
6 UBS 98.27 24
7 Credit Suisse 90.91 24
8 Morgan Stanley 69.61 19
9 Blackstone Group LP 68.59 3
10 Banc of America 36.49 5
Industry Total 3,297.92 [more]
Just some stuff I ran across that I thought I would share with you all [more]
We will not see a bottom of builder stocks in 2008, sorry Cramer. Some people think the happy days are back when, Jim Cramer calls a bottom in Builder stocks and the stimulus package gets approved. Sorry Jim but I prefer to do my own research. Everybody now days just wants a hot tip or a quant formula, man people never stop learning expensive lessons do they? ps your lesson's will be a lot more expensive if you listen to Cramer. This pretty much sums up Cramer's credibility.
On a much happier note. A WSJ article caught my eye a couple of months ago. Word on the street is that Coal is expected to be the next big thing, or the new “black gold” (I like numbers not rumors). Who is fueling this demand? China, China at the top of the list. Coal supplies 80% of China's current power capacity - and not very well, if you read my blog post on China’s pollution problem. China is creating demand for energy to power industrialization, mass transit for an increasingly urbanized populace and all the gizmos and gadgets desired by a wealthy society. The Stowe Coal Index, a composite of five dozen worldwide producers, doubled in 2007 compared to a 32% increase in the price of gold. I do not like coal as much as I like fertilizer but hey I doubt I will find many other situations with as great macro prospects as fertilizers have.
Speaking of China some other interesting stuff I have been reading is
R&D $$$ in China.
Probably the most interesting thing I ran across this week was an article by Thomas Pally about the end of the neoclassical monopoly. The part where he talks about the split between the Chicago school and MIT school is well written. I look forward to reading the mentioned book when it comes out. [more]