2012 YTD rate of return

[ERICOPOLY]

Eric - random question - do you have any recommendation of books that simply explain options? I've read a few, but most of my option trades have been unprofitable. I don't like the idea of the being against me.

 

+1

 

Sure, just give me the $1,000 fee for the Option Investing Congress where I'll reveal the secret to turn all of your losing options trades into winning ones!

 

Money back guaranteed!

 

Okay, here it is for free:

1)  Whenever you go to buy a put or call, write one instead.

2)  Whenever you go to write a put or a call, buy one instead.

 

I guarantee your success will turn around 180 degrees.

 

No, I don't have any books to recommend. 

[ragnarisapirate]

Ericopoly... I was hoping for an easy way to do options.... dammit!

 

Anyway, my results form the start of the year are hard to judge. While SYTE (and other illiquid positions) did really well (which is a good chunk of my portfolio) I feel like I did better on paper than I would do if I had to liquidate my holdings tomorrow. That has to be a consideration.

[Green King]

Eric - random question - do you have any recommendation of books that simply explain options? I've read a few, but most of my option trades have been unprofitable. I don't like the idea of the being against me.

 

+1

 

Sure, just give me the $1,000 fee for the Option Investing Congress where I'll reveal the secret to turn all of your losing options trades into winning ones!

 

Money back guaranteed!

 

Okay, here it is for free:

1)  Whenever you go to buy a put or call, write one instead.

2)  Whenever you go to write a put or a call, buy one instead.

 

I guarantee your success will turn around 180 degrees.

 

No, I don't have any books to recommend.

 

Sorry i have a rule not to buy easy ideas or answers.

But i can trade it with my ideas or life. (in form of time and labor)

 

but how did you get your perspective and understanding for options?

is it like when you looked at it it just worked?

[ERICOPOLY]

but how did you get your perspective and understanding for options?

is it like when you looked at it it just worked?

 

I just look at the strikes and the prices and then figure out what I want to do.

 

Use WFC for example:

 

http://finance.yahoo.com/q/op?s=WFC&m=2014-01

 

Supposing you want to hedge a $30,000 BAC position such that you don't want to accept any losses below $7 per share.

 

1)  Write the $30 strike 2014 WFC put for what looks like about $3, which is 10% of notional.

2)  Buy the $7 strike 2014 BAC put for what looks like about 11.5% of notional.

 

Now you can go to sleep at night knowing that the worst you can lose from your BAC position is about $2 per share.

 

Now... supposing BAC takes a dive to $7 a month from now but WFC doesn't.  And further suppose you believe it's irrational diving.  So now you can sell your BAC put for a profit and cover your WFC put perhaps for the same price you wrote it for.  Now you can maybe afford to increase your BAC position (just common stock) by 10% using the profit from those puts.

 

Stuff like this happens to me.  I don't count on it, but I take it when it comes.

[ERICOPOLY]

My guess you wrote puts on WFC.  Correct?

 

Yes.

[hyten1]

i am new at options, for me i never really got the hang of options in the past, but this year, it suddenly just clicked, not saying i am an expert at it. i still have a lot to learn.

 

i mainly use it for some extra income (especially sellings put, where i see the strike price relative to the proceed i get is attractive). especially when the likelihood of some of these stock getting to some of these low levels just seem very improbable. also i sell put were if the strike price is hit i wouldn't mind (I actually would be happen) to purchase some of these stocks at these extremely low prices. there are definitely risk. put i think this is will prob give me 1 or 2 extra % annually for the entire portfolio.

 

however, now i am trying to broaden my use of options to use it to lever up my varies long position or to protect the downside when appropriate. this is the area that i am still getting a hang of.

 

i think this is area were from what I can tell eric is good at.

 

hy

 

 

[meiroy]

 

 

Supposing you want to hedge a $30,000 BAC position such that you don't want to accept any losses below $7 per share.

 

1)  Write the $30 strike 2014 WFC put for what looks like about $3, which is 10% of notional.

2)  Buy the $7 strike 2014 BAC put for what looks like about 11.5% of notional.

 

Now you can go to sleep at night knowing that the worst you can lose from your BAC position is about $2 per share.

 

Market crashes. WFC goes to 22 and BAC to 5. You get called on the WFC trade costing 8-3 =5 and on the BAC you can get 7-5-0.805=1.2 to a total loss of 5-1.2 = 3.8 per share in addition of course to the paper loss on the common.  Did I get that right? I did not understand the importance of mentioning the percentage of notional.

[ERICOPOLY]

 

 

Supposing you want to hedge a $30,000 BAC position such that you don't want to accept any losses below $7 per share.

 

1)  Write the $30 strike 2014 WFC put for what looks like about $3, which is 10% of notional.

2)  Buy the $7 strike 2014 BAC put for what looks like about 11.5% of notional.

 

Now you can go to sleep at night knowing that the worst you can lose from your BAC position is about $2 per share.

 

Market crashes. WFC goes to 22 and BAC to 5. You get called on the WFC trade costing 8-3 =5 and on the BAC you can get 7-5-0.805=1.2 to a total loss of 5-1.2 = 3.8 per share in addition of course to the paper loss on the common.  Did I get that right? I did not understand the importance of mentioning the percentage of notional.

 

Don't be such a wussy  :)

 

I wouldn't even go into the stock market if all I was worred about is crashes.

 

This strategy is for going to sleep at night if a possible zero is the reason people are avoiding BAC.  Given my exposure to BAC, I have some protection in place but I financed it by taking on some WFC risk.

 

Now, if what you suggest happens then I'll add some leverage -- probably ditch the WFC at $22 and buy some WFC deep-in-the-money calls (or deep-in-the-money BAC calls, depending).

[Green King]

Thanks you

 

I too don't understand what u mean about notional. can you explain what u mean when u say notional and what u thinking when talking about it? Cuz i draw a blank when you use the word and talk about things. I've ur past post about it i can't seem to see it or understand it fully.

 

Also why ?

deep-in-the-money calls 

[meiroy]

 

Don't be such a wussy  :)

 

I wouldn't even go into the stock market if all I was worred about is crashes.

 

This strategy is for going to sleep at night if a possible zero is the reason people are avoiding BAC.  Given my exposure to BAC, I have some protection in place but I financed it by taking on some WFC risk.

 

 

Well, I wouldn't touch BAC in the first place if I thought it might get to 0 and if someone is indeed worried about that surely they are worried about general market risk as well. In this case, why not just buy a BAC put? The risk:protection from the WFC put doesn't seem that attractive (for the purpose mentioned.) As a side note, owning the common is a temporary loss of capital compared to permanent loss of capital, so just owning the common a market crash situation isn't that intimidating (assuming capital invested is not in need which is how it should be in the first place.)

 

 

Now, if what you suggest happens then I'll add some leverage -- probably ditch the WFC at $22 and buy some WFC deep-in-the-money calls (or deep-in-the-money BAC calls, depending).

 

In general I understand this comment keeping in mind your previous comment that it's best to leverage at market bottom, but not with the purpose of the trade. With the margin account loss you could have used the cash in the first place to buy the calls anyhow. I mean, the above comment seems unrelated to the trade.

 

I have almost zero experience with options, just trying to pick your brain.

 

 

 

 

 

[ERICOPOLY]

Well, I wouldn't touch BAC in the first place if I thought it might get to 0

 

Oh, well then you aren't me.

 

 

In this case, why not just buy a BAC put?

 

Because it costs a lot of money.

 

 

As a side note, owning the common is a temporary loss of capital compared to permanent loss of capital,

 

BAC's derivatives book is a hell of a lot larger than WFC's.  That's really the key concern I have where if the Europe shit hits the fan I'd be feeling better with some of my money in WFC. 

 

 

so just owning the common a market crash situation isn't that intimidating (assuming capital invested is not in need which is how it should be in the first place.)

 

Maybe you've never had 100% of your downside in one stock before, but I can assure you that it gets less intimidating when the downside risk is spread around a bit.

 

 

[ERICOPOLY]

In general I understand this comment keeping in mind your previous comment that it's best to leverage at market bottom, but not with the purpose of the trade. With the margin account loss you could have used the cash in the first place to buy the calls anyhow. I mean, the above comment seems unrelated to the trade.

 

What on Earth are you talking about?  You asked me what I'd do if the market crashed and I told you.  Then you come back arguing that it is not in purpose with the trade.  Huh?  I just care about making money.  I don't know that the market is going to crash, but when life hands me lemons I get thirsty for lemonade.

 

I don't want to buy any calls in the first place.  Look, if you buy BAC calls today then you'll potentially miss out on a nice dividend next year.  And when the calls expire if you take delivery on the shares you can't deduct the cost of the calls from the taxable income on the WFC puts.  One thing I might do is close one out on Dec 31st and the other on Jan 1st -- that's a nice little extra way to make a bit of money depending on whether next year is a big tax year or not (and whether I expect the following year to be). 

 

Rather than mess around with calls it is better to own the BAC common for the dividend, buy the BAC put that I presume will expire worthless, and write the WFC put which will have I presume a taxable gain that will be offset by the expiring BAC put.

 

And like I said, if BAC drops back to $7 whereas WFC doesn't move much I can dump the BAC puts and buy more BAC common.  Look at how WFC traded this summer vs BAC.  That's a very real scenario and it boosts my earnings power if it happens (more shares).  Yet if it doesn't happen and the market just goes up from here nothing bad comes of that either.

 

 

[giofranchi]

 

I don’t know about LRE, but I am extremely curious. Can you write something about them? I would really appreciate it very much! And, if I like what I see, I will surely consider an investment with them.

Thank you!

 

giofranchi

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/lre-l-lancashire-holdings-ltd/

 

Thank you very much, abcd!

 

giofranchi

[meiroy]

 

BAC's derivatives book is a hell of a lot larger than WFC's.  That's really the key concern I have where if the Europe shit hits the fan I'd be feeling better with some of my money in WFC. 

 

 

so just owning the common a market crash situation isn't that intimidating (assuming capital invested is not in need which is how it should be in the first place.)

 

Maybe you've never had 100% of your downside in one stock before, but I can assure you that it gets less intimidating when the downside risk is spread around a bit.

 

 

 

EDIT: saw your reply after writing this. Thanks for replying.

 

Yes, never happened so far to have a common go 100% down, it of course might happen which is why I'm diversified into 5 companies and not just one. I also own WFC directly for the reason which you mentioned.  Then again I also own GS, speaking of derivatives... If Europe shit hits the fan (I think it's more of a when than if) and BAC goes to 0 and some others with it, wouldn't some clearing houses as well? It is not going to 0 unless there is a total financial collapse and then these options are the last of our worries. We'll agree to disagree on this.

 

My queries were regarding the options and strategy and not specifically for BAC situation. I still do not understand how the risk:protection:reward is worth it considering you are worried some for BAC going to 0 and Europe poop floating around.

 

There is no protection for market risk only a partial protection for one common with an addition of risk. The situation I described is similar to what happened last year, would you be surprised if it happened again next month or next year? Doubt it.

 

Anyhow, my understanding of your general idea is to write puts on a company which you estimate has lower chances to drop and use that to buy protection on the common owned.

[meiroy]

In general I understand this comment keeping in mind your previous comment that it's best to leverage at market bottom, but not with the purpose of the trade. With the margin account loss you could have used the cash in the first place to buy the calls anyhow. I mean, the above comment seems unrelated to the trade.

 

What on Earth are you talking about?  You asked me what I'd do if the market crashed and I told you.  Then you come back arguing that it is not in purpose with the trade.  Huh?  I just care about making money.  I don't know that the market is going to crash, but when life hands me lemons I get thirsty for lemonade.

 

You're right, that paragraph was completely unclear. Sure seemed clearer when I wrote it...

[ERICOPOLY]

Anyhow, my understanding of your general idea is to write puts on a company which you estimate has lower chances to drop and use that to buy protection on the common owned.

 

No!!!

 

I have otherwise 100% of my money in BAC.

 

This isn't about guessing which company has a lower chance of dropping, this is about avoiding total armageddon in my portfolio if for some reason BAC goes towards zero.

 

Like you, I prefer to spread the downside. 

Unlike you, I don't want to diversify the upside. 

 

And while I'm at it if BAC were to drop and WFC doesn't, I'll take advantage of that.  Why the hell not?

 

Or if I have tons of gains next year I can write off the loss on the BAC puts on the last trading day of the year and book the gain on the WFC puts on the first trading day of the following year.

 

Those little potential extras are like "gift with purchase" goodies at the mall.

[meiroy]

Anyhow, my understanding of your general idea is to write puts on a company which you estimate has lower chances to drop and use that to buy protection on the common owned.

 

No!!!

 

I have otherwise 100% of my money in BAC.

 

This isn't about guessing which company has a lower chance of dropping, this is about avoiding total armageddon in my portfolio if for some reason BAC goes towards zero.

 

Like you, I prefer to spread the downside. 

Unlike you, I don't want to diversify the upside. 

 

And while I'm at it if BAC were to drop and WFC doesn't, I'll take advantage of that.  Why the hell not?

 

Or if I have tons of gains next year I can write off the loss on the BAC puts on the last trading day of the year and book the gain on the WFC puts on the first trading day of the following year.

 

Those little potential extras are like "gift with purchase" goodies at the mall.

 

1. You initially wrote:

"Supposing you want to hedge a $30,000 BAC position such that you don't want to accept any losses below $7 per share."

 

It started with an example for hedging a specific position.

 

2. You have chosen WFC for a reason, as you wrote, you did not choose it by random, hence my conclusion (my understanding of your general idea is to write puts on a company which you estimate has lower chances to drop and use that to buy protection on the common owned.). You consider WFC to be in a better position compared to BAC. i.e. lesser probability for dropping to 0. If you thought they have the same probability than there is no real spread of the downside to begin with.

 

I still think there is some contradiction in what you write, but will leave it at that.

 

Thanks again.

 

[Sportgamma]

No!!!

 

I have otherwise 100% of my money in BAC.

 

This isn't about guessing which company has a lower chance of dropping, this is about avoiding total armageddon in my portfolio if for some reason BAC goes towards zero.

 

Like you, I prefer to spread the downside. 

Unlike you, I don't want to diversify the upside.

 

Man, have you got some cojones! With your protections, how much would you estimate the downside to be, given a worst case scenario?

[berkshiremystery]

No!!!

 

I have otherwise 100% of my money in BAC.

 

This isn't about guessing which company has a lower chance of dropping, this is about avoiding total armageddon in my portfolio if for some reason BAC goes towards zero.

 

Like you, I prefer to spread the downside. 

Unlike you, I don't want to diversify the upside.

 

Man, have you got some cojones! With your protections, how much would you estimate the downside to be, given a worst case scenario?

 

Sportgamma + Eric,...

 

what,... only some BlackSwan-like Armageddon you are all lusting for,.... *wink/roll eyes

 

I got the gut feeling over the years, that by reading our board member posts,... that we all, or at least some of us,... are some sort of Armageddon like oil drillers,... almost like Bruce Willis wacho oil drilling crew,... well,... at least I got that impression while sitting at the shareholders dinner table. Other friendly table neighbors had this nice attitude,... ignore the crowd, be fearless, pick the rewards, and have afterwards some humble grin  ;D

 

[Kraven]

Yes, never happened so far to have a common go 100% down, it of course might happen which is why I'm diversified into 5 companies and not just one. I also own WFC directly for the reason which you mentioned.  Then again I also own GS, speaking of derivatives... If Europe shit hits the fan (I think it's more of a when than if) and BAC goes to 0 and some others with it, wouldn't some clearing houses as well?

 

I never understand these kinds of statements.  Maybe I'm naive.  I think people spend too much time listening to Buffett and his statements about things like if a nuke goes off in NYC people will still go on buying gum.  If "BAC goes to zero and some others with it", just stop there.  I don't get it.  It's like these major financial institutions will be worthless and what?  You're just going to keep looking for great investments?  I assure that if BAC, GS and "others" are worthless you won't need to worry about that.  Likely you will be concerned with looking for guns, ammo and canned goods.  I cannot envision a scenario where THE major financial institutions in the world are worthless and life just keeps on keeping on.  Same shit, different day.  I suppose any one of these institutions could be put into some kind of receivership, but all of them?  The world would be a fundamentally different place. 

[berkshiremystery]

Yes, never happened so far to have a common go 100% down, it of course might happen which is why I'm diversified into 5 companies and not just one. I also own WFC directly for the reason which you mentioned.  Then again I also own GS, speaking of derivatives... If Europe shit hits the fan (I think it's more of a when than if) and BAC goes to 0 and some others with it, wouldn't some clearing houses as well?

 

I never understand these kinds of statements.  Maybe I'm naive.  I think people spend too much time listening to Buffett and his statements about things like if a nuke goes off in NYC people will still go on buying gum.  If "BAC goes to zero and some others with it", just stop there.  I don't get it.  It's like these major financial institutions will be worthless and what?  You're just going to keep looking for great investments?  I assure that if BAC, GS and "others" are worthless you won't need to worry about that.  Likely you will be concerned with looking for guns, ammo and canned goods.  I cannot envision a scenario where THE major financial institutions in the world are worthless and life just keeps on keeping on.  Same shit, different day.  I suppose any one of these institutions could be put into some kind of receivership, but all of them?  The world would be a fundamentally different place.

 

The only event where every major financial insitution migh go worthless, might be some event where over 90% of their counterpart disappears,... i.e. all customers are suddendly dead,.... how likely is such an event where perhaps 270 million U.S. citizens die, and this board would have almost no readers. Seems to me only some Yellowstone super caldera eruption. The three super eruptions occurred 2.1 million, 1.3 million, and 640,000 years ago. Cheers!

[twacowfca]

Eric - random question - do you have any recommendation of books that simply explain options? I've read a few, but most of my option trades have been unprofitable. I don't like the idea of the being against me.

 

+1

 

Sure, just give me the $1,000 fee for the Option Investing Congress where I'll reveal the secret to turn all of your losing options trades into winning ones!

 

Money back guaranteed!

 

Okay, here it is for free:

1)  Whenever you go to buy a put or call, write one instead.

2)  Whenever you go to write a put or a call, buy one instead.

 

I guarantee your success will turn around 180 degrees.

 

No, I don't have any books to recommend.

 

LOL  your sure fire formula for turning poor results around 180 degrees.  :)

 

But wait a minute.  Let's take a deeper look at what you have said.  Most people buy puts or calls.  They don't write them.  However, most of the time the consistent profits are in writing options, not buying them, because the writer has to accept the risk of a large loss if there is a big move, while the buyer wants to profit from a big move upward or gain protection from a big move downward. 

 

It's like what my favorite insurance company does in insuring against catastrophes.  They make about 20 % per year on their capital on average, by jumping in and writing extra business when rates spike after a big disaster when other insurance companies are licking their wounds and refusing to take on that risk cheaply anymore.  But eventually they will have a bad year, and they and their investors need to be prepared for that.

 

These writers of options or insurance are profiting from the only virtually sure thing in finance: that volatility will always regress to the mean.  ( except when the world ends or the asteroid the size of Manhattan actually strikes Manhattan ).  Those who take on large risks try to lay off their bets in some way by diversification into (hopefully) non correlated risks or hedging, like Eric sometimes does. 

 

The most successful will buy (an option) low (when implied volatility is low or when the potential move in price is very great) and sell (write an option) when the implied volatility is very high or the potential adverse move is very low.  They will also hedge as much as possible cost effectively.

 

By the way, the term, implied volatility, is a misnomer.  It's really a fear factor.  For example, the S& P 500 recently rose about 2% in one day.  Yet the implied volatility of index options actually went down dramatically that day instead of up as the historical volatility of the index increased.  However, if the S&P 500 had gone down a large amount instead of up that day, the implied volatility of its options would have certainly increased.

 

 

[Uccmal]

Exactly Kraven, If BAC and WFc go to zero, society as we know it will have disintegrated. 

 

Ericopoly,  To clarify.  People asked you what your return on your money invested was so far this year.  The did not ask how much cash you keep aside for living expenses.

 

I am going to assume that you keep a few years living expenses set aside, more or less in cash.

 

I am 120% invested right now, but I have a full time job,my wife has a better FT job (than mine).  The house is completely renovated and half paid for.  My intention, once BAC and AIG run up is to pay down remaining debt, and quit my job. 

 

 

[returnonmycapital]

Quite frankly I don't know my YTD rate of return and I don't care.

 

Overall, the underlying businesses are doing well, the stock prices still provide a decent margin of safety...and that's what important to me.

 

Take care of the bottom line and the stock price will follow. I've been a partial owner of all the businesses in it since 4 to 9 years!

 

 

Hear-hear, this is the way to think.

[hyten1]

twacowfa,

 

i am curious about your statement

 

"However, most of the time the consistent profits are in writing options, not buying them, because the writer has to accept the risk of a large loss if there is a big move, while the buyer wants to profit from a big move upward or gain protection from a big move downward. "

 

just curious on why you say this? I am not saying you are wrong or right, I am just curious as a beginner in options.

 

personally, I found it strange and advantages to me that a few months ago i could sell/write put options for some stock at extremely low strike prices (i don't see how they can get to these strike prices unless something extremely bad happen) at a above 10% return with the proceed i get.

 

part of me feel like, these are like free money that i am picking up. but they soon disappear as stock market went up and the % return on the proceed seem not to be worth it.

 

just curious if anyone/everyone can provide your opinion/reason on the above?

 

since i am new to options (just started using it this year)

 

hy