2012 YTD rate of return

[giofranchi]

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.

 

twacowfca,

If I want to write put options on something I would like to own at a lower price, and use the proceedings to invest somewhere else – for instance in something that I like as much, but I consider to be already at a price undervalued enough –, do you know a broker that works also in Italy and that will allow me to do so?

I tried with both Banca Intesa and Unicredit, but I failed… They don’t let me do that on companies listed in stock exchanges outside Italy…

Maybe it’s a silly question, because you don’t know anything about Italy, but you seem a master of the trade, so I try to ask you anyway. ;)

It would surely be very nice to have some float I could work with!

Thank you very much,

 

giofranchi

[berkshiremystery]

 

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.

 

twacowfca,

If I want to write put options on something I would like to own at a lower price, and use the proceedings to invest somewhere else – for instance in something that I like as much, but I consider to be already at a price undervalued enough –, do you know a broker that works also in Italy and that will allow me to do so?

I tried with both Banca Intesa and Unicredit, but I failed… They don’t let me do that on companies listed in stock exchanges outside Italy…

Maybe it’s a silly question, because you don’t know anything about Italy, but you seem a master of the trade, so I try to ask you anyway.  ;)

It would surely be very nice to have some float I could work with!

Thank you very much,

 

giofranchi

 

giofranchi,...

 

you will definitely be able to write put options in real time with "Interactive Brokers"

 

http://www.interactivebrokers.com/ibg/main.php

 

http://www.interactivebrokers.com/en/ibglobal_sites.php

 

 

They also have a multi-currency platform, thus... USD, EUR, CAD... you can have integrated sub-accounts in any currency with your main account. Interactive Brokers are worldwide leaders for option trading. And some board members mentioned that they are also customers. Hope this helps. Cheers!

[ERICOPOLY]

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 actually don't keep cash, I keep some part of the position hedged with puts -- I can sell the underlying stock and put and buy the corresponding strike call if I need to raise cash.  This is a $4 strike put, doesn't cost all that much.  In the meanwhile, I have a large margin borrowing capacity and just have an automatic monthly withdrawal setup to transfer to my checking account from IB. 

 

 

[giofranchi]

 

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.

 

twacowfca,

If I want to write put options on something I would like to own at a lower price, and use the proceedings to invest somewhere else – for instance in something that I like as much, but I consider to be already at a price undervalued enough –, do you know a broker that works also in Italy and that will allow me to do so?

I tried with both Banca Intesa and Unicredit, but I failed… They don’t let me do that on companies listed in stock exchanges outside Italy…

Maybe it’s a silly question, because you don’t know anything about Italy, but you seem a master of the trade, so I try to ask you anyway.  ;)

It would surely be very nice to have some float I could work with!

Thank you very much,

 

giofranchi

 

giofranchi,...

 

you will definitely be able to write put options in real time with "Interactive Brokers"

 

http://www.interactivebrokers.com/ibg/main.php

 

http://www.interactivebrokers.com/en/ibglobal_sites.php

 

 

They also have a multi-currency platform, thus... USD, EUR, CAD... you can have integrated sub-accounts in any currency with your main account. Interactive Brokers are worldwide leaders for option trading. And some board members mentioned that they are also customers. Hope this helps. Cheers!

 

Thank you very much berkshiremystery!

You are always very helpful! And I will check them out asap.

Just one more question:

Do you think they will let me write naked put options, or that they will ask me to cover them with cash? My idea of getting some float to invest doesn’t work, if I must put aside the cash to eventually buy shares at the strike price. Right?

 

giofranchi

[racemize]

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.

 

Ok, so I was trying to follow your conversation with meiroy, but I think I failed.  I'm just trying to get the mechanics of the above.  First, are you fully hedging your whole position of BAC with the above?

 

1) If they both move up or down in concert, then they offset right?  That still leaves you with the loss on BAC in your original position?

 

2) If BAC drops to 7 or lower, and WFC holds, you get your protection.

 

3) If WFC drops and BAC goes up, you lose? (except your main position has increased, but if you fully hedged, then you'd have a corresponding amount of WFC to deal with)

 

 

On the, "you can go to sleep knowing the most you can lose is 2 dollars", bit, that's only true if they both don't go down a lot, no?  i.e., if they both drop by half, you don't have any protection on your main BAC position since the other two offset each other?

[meiroy]

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.

 

I think you had this pre-made anti buffett argument and pulled it out on that.   

 

I was saying pretty much what you just did.  You left the last sentence out in your quote "It is not going to 0 unless there is a total financial collapse and then these options are the last of our worries.". 

 

As far as Buffet, I doubt very much he said anything even remotely close to what you claim him to represent.  All he is saying, as does Peter Lynch mentioned in a recent thread, that he believes in the core system of the USA and that to be a successful investor you have to be at least somewhat optimistic.  I'm pretty sure he would acknowledge what you wrote above, more or less.

[berkshiremystery]

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 actually don't keep cash, I keep some part of the position hedged with puts -- I can sell the underlying stock and put and buy the corresponding strike call if I need to raise cash.  This is a $4 strike put, doesn't cost all that much.  In the meanwhile, I have a large margin borrowing capacity and just have an automatic monthly withdrawal setup to transfer to my checking account from IB.

 

Eric,..

 

might I ask you the same question as our giofranchi just asked me,...

 

... does IB allow you to write your uncovered puts naked ????  ... or do they require some "cash collateral", I mean,... put some "hold" on your margin equity base. Because this is usually Some of the biggest drawbacks, if brokers don't let you write naked puts.

[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.

 

I think you had this pre-made anti buffett argument and pulled it out on that.   

 

I was saying pretty much what you just did.  You left the last sentence out in your quote "It is not going to 0 unless there is a total financial collapse and then these options are the last of our worries.". 

 

As far as Buffet, I doubt very much he said anything even remotely close to what you claim him to represent.  All he is saying, as does Peter Lynch mentioned in a recent thread, that he believes in the core system of the USA and that to be a successful investor you have to be at least somewhat optimistic.  I'm pretty sure he would acknowledge what you wrote above, more or less.

 

You give me too much credit.  No "pre-made" arguments.  Sorry if I missed your last sentence.  However, then there is no reason really to fear all these financials going to zero, is there? 

 

Buffett said something to the effect that they would fund their Wrigley investment even if a bomb was detonated in New York or something to that effect.  My apologies, I don't have time to look it up.  The argument was simply that life goes on even if the worst happens.  I suppose it would matter how severe the damage was.  After all, we had 9/11 and people did go on buying gum.  So what do I know?

[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.

 

Ok, so I was trying to follow your conversation with meiroy, but I think I failed.  I'm just trying to get the mechanics of the above.  First, are you fully hedging your whole position of BAC with the above?

 

1) If they both move up or down in concert, then they offset right?  That still leaves you with the loss on BAC in your original position?

 

2) If BAC drops to 7 or lower, and WFC holds, you get your protection.

 

3) If WFC drops and BAC goes up, you lose? (except your main position has increased, but if you fully hedged, then you'd have a corresponding amount of WFC to deal with)

 

 

On the, "you can go to sleep knowing the most you can lose is 2 dollars", bit, that's only true if they both don't go down a lot, no?  i.e., if they both drop by half, you don't have any protection on your main BAC position since the other two offset each other?

 

Never risk more than you can afford to lose.

That is a true quote from my grandmother, who herself was a stock picker.

 

I am hedging accordingly.  Some of the BAC position is not hedged at all, just like those who are diversified.  The part I cannot afford to lose is hedged.

 

Yes, of course I take on the risk of WFC declining.  In this regard it is the same as what everyone does when they claim to be diversifying their risks.  That's just plain vanilla flavor, only it's not regular ice cream -- some kind of weird frozen yogurt.

 

 

 

 

[berkshiremystery]

 

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.

 

twacowfca,

If I want to write put options on something I would like to own at a lower price, and use the proceedings to invest somewhere else – for instance in something that I like as much, but I consider to be already at a price undervalued enough –, do you know a broker that works also in Italy and that will allow me to do so?

I tried with both Banca Intesa and Unicredit, but I failed… They don’t let me do that on companies listed in stock exchanges outside Italy…

Maybe it’s a silly question, because you don’t know anything about Italy, but you seem a master of the trade, so I try to ask you anyway.  ;)

It would surely be very nice to have some float I could work with!

Thank you very much,

 

giofranchi

 

giofranchi,...

 

you will definitely be able to write put options in real time with "Interactive Brokers"

 

http://www.interactivebrokers.com/ibg/main.php

 

http://www.interactivebrokers.com/en/ibglobal_sites.php

 

 

They also have a multi-currency platform, thus... USD, EUR, CAD... you can have integrated sub-accounts in any currency with your main account. Interactive Brokers are worldwide leaders for option trading. And some board members mentioned that they are also customers. Hope this helps. Cheers!

 

Thank you very much berkshiremystery!

You are always very helpful! And I will check them out asap.

Just one more question:

Do you think they will let me write naked put options, or that they will ask me to cover them with cash? My idea of getting some float to invest doesn’t work, if I must put aside the cash to eventually buy shares at the strike price. Right?

 

giofranchi

 

Gio,...

 

I just asked this question Eric,... because he seems to be with IB,...  ::)

 

so let's wait for his answer,... I'm as curious as you to know this....    ;)

 

Damm,... I almost forgot to tell, that I wrote some small amount of puts on AIG, some months ago,... but they are already profitable,... so theoretically I could repurchase them a lower prices to close them out. But I plan to let them run out,... the only disadvantage I got, like you mentioned... they put some "hold" on my margin equity base,... but I currently don't use IB.

[racemize]

 

Ok, so I was trying to follow your conversation with meiroy, but I think I failed.  I'm just trying to get the mechanics of the above.  First, are you fully hedging your whole position of BAC with the above?

 

1) If they both move up or down in concert, then they offset right?  That still leaves you with the loss on BAC in your original position?

 

2) If BAC drops to 7 or lower, and WFC holds, you get your protection.

 

3) If WFC drops and BAC goes up, you lose? (except your main position has increased, but if you fully hedged, then you'd have a corresponding amount of WFC to deal with)

 

 

On the, "you can go to sleep knowing the most you can lose is 2 dollars", bit, that's only true if they both don't go down a lot, no?  i.e., if they both drop by half, you don't have any protection on your main BAC position since the other two offset each other?

 

Never risk more than you can afford to lose.

That is a true quote from my grandmother, who herself was a stock picker.

 

I am hedging accordingly.  Some of the BAC position is not hedged at all, just like those who are diversified.  The part I cannot afford to lose is hedged.

 

Yes, of course I take on the risk of WFC declining.  In this regard it is the same as what everyone does when they claim to be diversifying their risks.  That's just plain vanilla flavor, only it's not regular ice cream -- some kind of weird frozen yogurt.

 

Sure, I get that part, I just wanted to confirm the mechanics--mostly, is 1 correct?  I think I get it at this point.

[value-is-what-you-get]

 

Ok, so I was trying to follow your conversation with meiroy, but I think I failed.  I'm just trying to get the mechanics of the above.  First, are you fully hedging your whole position of BAC with the above?

 

1) If they both move up or down in concert, then they offset right?  That still leaves you with the loss on BAC in your original position?

 

2) If BAC drops to 7 or lower, and WFC holds, you get your protection.

 

3) If WFC drops and BAC goes up, you lose? (except your main position has increased, but if you fully hedged, then you'd have a corresponding amount of WFC to deal with)

 

 

On the, "you can go to sleep knowing the most you can lose is 2 dollars", bit, that's only true if they both don't go down a lot, no?  i.e., if they both drop by half, you don't have any protection on your main BAC position since the other two offset each other?

 

I think of options in a more fluid sense - I see it as managing likelihoods.

 

1.  This still leaves you with the loss on BAC original position - if you sell your underlying position at that point.  Selling the puts on WFC is an attempt to avoid having your protection move up and down in concert so if they do, it is more likely to be from Mr. Market and this presents an opportunity to sell profitable put position and buy more underlying.

 

 

[racemize]

 

Ok, so I was trying to follow your conversation with meiroy, but I think I failed.  I'm just trying to get the mechanics of the above.  First, are you fully hedging your whole position of BAC with the above?

 

1) If they both move up or down in concert, then they offset right?  That still leaves you with the loss on BAC in your original position?

 

2) If BAC drops to 7 or lower, and WFC holds, you get your protection.

 

3) If WFC drops and BAC goes up, you lose? (except your main position has increased, but if you fully hedged, then you'd have a corresponding amount of WFC to deal with)

 

 

On the, "you can go to sleep knowing the most you can lose is 2 dollars", bit, that's only true if they both don't go down a lot, no?  i.e., if they both drop by half, you don't have any protection on your main BAC position since the other two offset each other?

 

I think of options in a more fluid sense - I see it as managing likelihoods.

 

1.  This still leaves you with the loss on BAC original position - if you sell your underlying position at that point.  Selling the puts on WFC is an attempt to avoid having your protection move up and down in concert so if they do, it is more likely to be from Mr. Market and this presents an opportunity to sell profitable put position and buy more underlying.

 

sure, I was just trying to reconcile the statement of "you can sleep at night knowing your loss is at most 7".  To confirm, that sentence is missing "as long as WFC doesn't go down the same amount" I believe?

[giofranchi]

 

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.

 

twacowfca,

If I want to write put options on something I would like to own at a lower price, and use the proceedings to invest somewhere else – for instance in something that I like as much, but I consider to be already at a price undervalued enough –, do you know a broker that works also in Italy and that will allow me to do so?

I tried with both Banca Intesa and Unicredit, but I failed… They don’t let me do that on companies listed in stock exchanges outside Italy…

Maybe it’s a silly question, because you don’t know anything about Italy, but you seem a master of the trade, so I try to ask you anyway.  ;)

It would surely be very nice to have some float I could work with!

Thank you very much,

 

giofranchi

 

giofranchi,...

 

you will definitely be able to write put options in real time with "Interactive Brokers"

 

http://www.interactivebrokers.com/ibg/main.php

 

http://www.interactivebrokers.com/en/ibglobal_sites.php

 

 

They also have a multi-currency platform, thus... USD, EUR, CAD... you can have integrated sub-accounts in any currency with your main account. Interactive Brokers are worldwide leaders for option trading. And some board members mentioned that they are also customers. Hope this helps. Cheers!

 

Thank you very much berkshiremystery!

You are always very helpful! And I will check them out asap.

Just one more question:

Do you think they will let me write naked put options, or that they will ask me to cover them with cash? My idea of getting some float to invest doesn’t work, if I must put aside the cash to eventually buy shares at the strike price. Right?

 

giofranchi

 

Gio,...

 

I just asked this question Eric,... because he seems to be with IB,...  ::)

 

so let's wait for his answer,... I'm as curious as you to know this....    ;)

 

Thank you, berkshiremystery!

It is really a pleasure to know people as thouthful, competent, and kind as you are.

 

giofranchi

[ERICOPOLY]

 

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.

 

twacowfca,

If I want to write put options on something I would like to own at a lower price, and use the proceedings to invest somewhere else – for instance in something that I like as much, but I consider to be already at a price undervalued enough –, do you know a broker that works also in Italy and that will allow me to do so?

I tried with both Banca Intesa and Unicredit, but I failed… They don’t let me do that on companies listed in stock exchanges outside Italy…

Maybe it’s a silly question, because you don’t know anything about Italy, but you seem a master of the trade, so I try to ask you anyway.  ;)

It would surely be very nice to have some float I could work with!

Thank you very much,

 

giofranchi

 

giofranchi,...

 

you will definitely be able to write put options in real time with "Interactive Brokers"

 

http://www.interactivebrokers.com/ibg/main.php

 

http://www.interactivebrokers.com/en/ibglobal_sites.php

 

 

They also have a multi-currency platform, thus... USD, EUR, CAD... you can have integrated sub-accounts in any currency with your main account. Interactive Brokers are worldwide leaders for option trading. And some board members mentioned that they are also customers. Hope this helps. Cheers!

 

Thank you very much berkshiremystery!

You are always very helpful! And I will check them out asap.

Just one more question:

Do you think they will let me write naked put options, or that they will ask me to cover them with cash? My idea of getting some float to invest doesn’t work, if I must put aside the cash to eventually buy shares at the strike price. Right?

 

giofranchi

 

Gio,...

 

I just asked this question Eric,... because he seems to be with IB,...  ::)

 

so let's wait for his answer,... I'm as curious as you to know this....    ;)

 

It does eat up margin capacity.  In the event of a steep pullback you can always ditch the puts and common stock position and purchase calls.

 

Lots of flexibility.

 

Again, I'm hedging about 40% of my position, and some of that is actually in my RothIRA where there are no tax consequences.  There, I own the common stock of something like WFC and write calls.  I then use the call premium to offset the cost of the embedded put in the BAC calls and I collect the WFC dividend.

[Uccmal]

 

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.

 

twacowfca,

If I want to write put options on something I would like to own at a lower price, and use the proceedings to invest somewhere else – for instance in something that I like as much, but I consider to be already at a price undervalued enough –, do you know a broker that works also in Italy and that will allow me to do so?

I tried with both Banca Intesa and Unicredit, but I failed… They don’t let me do that on companies listed in stock exchanges outside Italy…

Maybe it’s a silly question, because you don’t know anything about Italy, but you seem a master of the trade, so I try to ask you anyway.  ;)

It would surely be very nice to have some float I could work with!

Thank you very much,

 

giofranchi

 

giofranchi,...

 

you will definitely be able to write put options in real time with "Interactive Brokers"

 

http://www.interactivebrokers.com/ibg/main.php

 

http://www.interactivebrokers.com/en/ibglobal_sites.php

 

 

They also have a multi-currency platform, thus... USD, EUR, CAD... you can have integrated sub-accounts in any currency with your main account. Interactive Brokers are worldwide leaders for option trading. And some board members mentioned that they are also customers. Hope this helps. Cheers!

 

Thank you very much berkshiremystery!

You are always very helpful! And I will check them out asap.

Just one more question:

Do you think they will let me write naked put options, or that they will ask me to cover them with cash? My idea of getting some float to invest doesn’t work, if I must put aside the cash to eventually buy shares at the strike price. Right?

 

giofranchi

 

Gio,...

 

I just asked this question Eric,... because he seems to be with IB,...  ::)

 

so let's wait for his answer,... I'm as curious as you to know this....    ;)

 

 

I know I am not Eric, and I dont deal with IB - TDwaterhouse.  Writing Naked puts requires you to put up collateral.  Say you write puts on a $30 stock for $3 and the puts exercise at $25.00.  You get $3 up front.  If the stock drops you keep using margin, or your cash balance up, ultimately to the price of the underlying stock.  You can start with a net cash position and end up with a margin call very quickly.  The only times I have ever had margin calls is when I have written puts.

 

I gave up this practice.  There are other ways to earn income. 

 

I understand what Eric does and it works for him.  I have no opinion on anything else about the strategy. 

[meiroy]

You give me too much credit. 

 

 

That's OK, don't worry about it, enjoy it. I'm expecting 110% yearly interest payments though.

[berkshiremystery]

 

It does eat up margin capacity.  In the event of a steep pullback you can always ditch the puts and common stock position and purchase calls.

 

Lots of flexibility.

 

Again, I'm hedging about 40% of my position, and some of that is actually in my RothIRA where there are no tax consequences.  There, I own the common stock of something like WFC and write calls.  I then use the call premium to offset the cost of the embedded put in the BAC calls and I collect the WFC dividend.

 

Yeah,... as you say, it eats up margin capacity,... that is some drawback also for me.

[mikazo]

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.

 

+1

[ERICOPOLY]

 

Ok, so I was trying to follow your conversation with meiroy, but I think I failed.  I'm just trying to get the mechanics of the above.  First, are you fully hedging your whole position of BAC with the above?

 

1) If they both move up or down in concert, then they offset right?  That still leaves you with the loss on BAC in your original position?

 

2) If BAC drops to 7 or lower, and WFC holds, you get your protection.

 

3) If WFC drops and BAC goes up, you lose? (except your main position has increased, but if you fully hedged, then you'd have a corresponding amount of WFC to deal with)

 

 

On the, "you can go to sleep knowing the most you can lose is 2 dollars", bit, that's only true if they both don't go down a lot, no?  i.e., if they both drop by half, you don't have any protection on your main BAC position since the other two offset each other?

 

I think of options in a more fluid sense - I see it as managing likelihoods.

 

1.  This still leaves you with the loss on BAC original position - if you sell your underlying position at that point.  Selling the puts on WFC is an attempt to avoid having your protection move up and down in concert so if they do, it is more likely to be from Mr. Market and this presents an opportunity to sell profitable put position and buy more underlying.

 

sure, I was just trying to reconcile the statement of "you can sleep at night knowing your loss is at most 7".  To confirm, that sentence is missing "as long as WFC doesn't go down the same amount" I believe?

 

 

This are my original words before you edited out the important part (now in bold):

 

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

 

 

 

[hyten1]

uccmal

 

i am not sure what you mean regarding writing puts, i have done it and i usually pick strike prices that is extremely low (i also have cash around)

 

for example I wrote BAC Jan 14 puts with strike of $5, I got 0.77 per share for it

 

in the event BAC hits $5 i'll be happen to exercise this option (this mean I am buy BAC at $4.23 per share)

 

how come you get margin calls so easily?

 

hy

[DCG]

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

 

I am also unsure of what you mean by Notional.

[onyx1]

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.

 

hy

 

hyten1

 

The psychological underpinning for this dynamic is beautifully described in Chapter 29 on Kahneman's book Thinking Fast and Slow, when he uses the following example:

 

In each of the four examples below your chances of receiving $1mm increases by 5%.  Is the news equally good in each example?

A.  0% to 5%

B. 5% to 10%

C. 60% to 65%

D. 95% to 100%

 

    From an expected value standpoint all four scenarios have equal value.  However from a psychological standpoint, Scenarios A and D are much more valuable (A introduces upside that previously was not there, and D eliminates all remaining downside risk).  For this reason people will gladly pay a premium over the probability value for scenarios A and D.  This dynamic is the foundation the insurance business, lotteries, Las Vegas gambling, lawsuits and countless more.  If you think of written option premiums as insurance that introduces upside, (or eliminates downside risk), Twacowfa's statement will make sense.

 

[ERICOPOLY]

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

 

I am also unsure of what you mean by Notional.

 

Let's say BAC is trading at $10 a share and you purchase 100 contracts at $1.50 each underlying share.

 

This costs you $15,000 to purchase the upside on $100,000 worth of shares.  $100,000 is the "notional" value of your contracts, even though your downside is $15,000.

 

$15,000 is 15% of $100,000, thus it is 15% of the "notional" value.

 

Clear as mud?

 

[giofranchi]

 

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.

 

twacowfca,

If I want to write put options on something I would like to own at a lower price, and use the proceedings to invest somewhere else – for instance in something that I like as much, but I consider to be already at a price undervalued enough –, do you know a broker that works also in Italy and that will allow me to do so?

I tried with both Banca Intesa and Unicredit, but I failed… They don’t let me do that on companies listed in stock exchanges outside Italy…

Maybe it’s a silly question, because you don’t know anything about Italy, but you seem a master of the trade, so I try to ask you anyway.  ;)

It would surely be very nice to have some float I could work with!

Thank you very much,

 

giofranchi

 

giofranchi,...

 

you will definitely be able to write put options in real time with "Interactive Brokers"

 

http://www.interactivebrokers.com/ibg/main.php

 

http://www.interactivebrokers.com/en/ibglobal_sites.php

 

 

They also have a multi-currency platform, thus... USD, EUR, CAD... you can have integrated sub-accounts in any currency with your main account. Interactive Brokers are worldwide leaders for option trading. And some board members mentioned that they are also customers. Hope this helps. Cheers!

 

Thank you very much berkshiremystery!

You are always very helpful! And I will check them out asap.

Just one more question:

Do you think they will let me write naked put options, or that they will ask me to cover them with cash? My idea of getting some float to invest doesn’t work, if I must put aside the cash to eventually buy shares at the strike price. Right?

 

giofranchi

 

Gio,...

 

I just asked this question Eric,... because he seems to be with IB,...  ::)

 

so let's wait for his answer,... I'm as curious as you to know this....    ;)

 

 

I know I am not Eric, and I dont deal with IB - TDwaterhouse.  Writing Naked puts requires you to put up collateral.  Say you write puts on a $30 stock for $3 and the puts exercise at $25.00.  You get $3 up front.  If the stock drops you keep using margin, or your cash balance up, ultimately to the price of the underlying stock.  You can start with a net cash position and end up with a margin call very quickly.  The only times I have ever had margin calls is when I have written puts.

 

I gave up this practice.  There are other ways to earn income. 

 

I understand what Eric does and it works for him.  I have no opinion on anything else about the strategy.

 

Collaterl must be cash? Why can it not be shares of other companies you own? If the strike price is low enough and the company is one I would like to own for a long time, I would be glad to sell some shares in other investments, to buy a stake in the company I sold naked puts on.

I know it is not without risk, but, if thought out conservately, I believe it could work.

 

giofranchi