How do you plan to park your money?

[anxvariety]

Powayseller,

Two parts to this message…

Part 1
The basic answer to ”would you please post your losses as well as your wins” is below:

The sum of all my option buy and sells for 2006 –
Realized gain for 2006: 56%
Unrealized gain for 2006: 27%

I have no realized losses for 2006, but I have some unrealized losses(~$-600) I’ll happily send you the line items if you send me an email address to send it to… [email protected]

…and then it all came crashing down! 🙂

Part 2

I think investors like you that are interested in options but don’t necessarily want to follow things day by day and deal with high % risk would be most interested in ‘writing covered calls’. I’ll post links at very bottom. I have a feeling you’ll REALLY like the concept. The tax guy I use was the first person to tell me about them… it’s sort of a best of both worlds, at least based on what I know about you(from reading your posts).

Covered call:
http://en.wikipedia.org/wiki/Covered_call

The wiki almost overcomplicates it here’s another:
http://invest-faq.com/articles/deriv-option-covered-call.html

Here’s my attempt at an explanation:
You are long on COP and have 500 shares… You decide to write a covered call.. You sell 1 Jan 07 $70 option for the market price (right now they are $2.95).. This means you are now obligated to sell the person that bought the option from you 100 shares of COP for $70 in the 3rd week of January of 07. Each option represents 100 shares – so they give you $295 dollars for that option… if the stock price doesn’t go to $70 or above in between now and Jan 07, their option expires worthless and you keep the $295… if the stock price is $75 in Jan 07 or anytime before that, the person can take it away from you and give you $70 each for 100 shares(the stock could also be at $100 at this time)- they can then sell them and profit that $5 for themselves… So your risk is in opportunity cost, or as that Invest FAQ link puts it: “While the covered-call writer has no risk of losing huge amounts of money, there is an attendant risk of missing out on large gains.” and “My personal advice for new options people is to begin by writing covered call options for stocks currently trading below the strike price of the option; in jargon, to begin by writing out-of-the-money covered calls.”

[rseiser]

I think the option calculation on buying the COP calls (listed further above) is not entirely fair. It looks easy when choosing a stock that has gone up 10% in one month. But there can be so many other scenarios. What if it goes down 8%, down 2%, or up 4%? That’s not unreasonable since stocks might go up about 1%/month on average. Sure, I understand the volatility and downside protection, but you still need to make many decisions along the way when to sell or hold. E.g it could go up 20% in three months and then loose 15% in the remaining two months. Or it could loose 15% first and then gain 25%. I am just saying making money in options is not easy.

[powayseller]

How would this investment have turned out if the stock or the call had gone down 10%? What if it had gone up, then down? Or down, then up? What is the max amount of money you can lose? Just your investment, or more? How hard/easy is it to make money in options? As I wrote before, if it was so super easy, like a click of a mouse, everyone would be doing it. So I know it has a high risk of failure, but would like it quantified. Thank you.

[anxvariety]

Good question.. when the stock wend down to 57, these COP options were down probably around 60-70%(dont know the exact #)

I don’t know how easy or hard it is… I look at amatuer level information like moving averages, bollinger bands, insider buying, industry trend, and most importantly what Zeal says!! 🙂

Hopefully I’m not giving off a vibe like I’ve pulled it off, or I can do it over again, because I probably just got good advice from Zeal and also got lucky. I was just suggesting that it might be an interesting approach for enabling a person to park most of their money in something super safe, yet still get some highly leveraged volatility with a little bit of money.

If you get Zeal Newsletter, there is a part where they list their currently open positions and what % gain they’ve had.. overall since I’ve subscribed Zeal has done very well.. maybe in the past they didn’t, maybe the only reason I found them was because they started to gain popularity as precious metals took off? Don’t know for sure…

[powayseller]

I disagree that options is “parking your money in something super safe”. You risk losing your entire investment in options. Zeal can be wrong too. Not every trade they make is going to be right.

I emailed Zeal a few weeks ago, explaining why the commodities (except PMs) will go down when the US enters its recession. I gave the example of the commodities and global stock market fall in 2000-2001 when the US had a capital-spending led recession. This next recession, starting in 07, will be much worse, because it will be consumer led. As in 2000-2001, the Asian countries are still export-dependent, and their stock markets will fall once again. Commodities will fall once again, as they did in 2000-2001.

Zeal did not respond to my e-mail. I hope they will write an article addressing this problem. Until they do, I am very careful with Zeal, because they are ignoring the effects of the housing bubble and its unraveling. I really lost respect for their research after that…

BTW, the only super safe way to park money is in an FDIC insured account.

[UP IN ARMS]

No way, I’m parking my ALL my cash in REAL ESTATE!!!!!!!!

[PD]

Up in arms, just make sure you invest in granite countertops for your properties. 😉

[UP IN ARMS]

hahahahah

[lewman]

I think some of us here are mis-interpreting anxvariety’s statements about options. It is not easy to make money in options but the covered call strategy he noted is an excellent way to “enhance potential returns without incurring additional risk on capital”. I’m bored at work so let me waste my employer’s time and give an example. Let’s borrow Powayseller’s long term position in COP as a basis for our discussion.

Let say your current strategy is buy-and-hold for the long term so you bought COP and stick the statement in a drawer and go on a 2 year vacation. This buy-and-hold strategy implies that you expect COP to EVENTUALLY rise even though as a rational person you do know that it will fluctuate. And this strategy limits your upside potential to the point-to-point return of the stock, i.e. if you bought at $100, then it goes to $150, then back down to $120 then up to $200, your return is limited to $100 per share or 100%. As a greedy person (aren’t we all ?) you ask, is there a way to make more than 100% in this scenario without taking on more risk ? I dare ask this question because YES THERE IS !

Now let’s refine this simple buy-and-hold strategy with covered call. In order to do this, it’s best that you have an objective measure to help determine when a stock is temporarily expensive (for those subscribing Zeal, the stock price relative to its 200dma is as good as any and we’ll refer to it as the rCOP). So you mull it over on the excel spreadsheet and let say it tells you that everytime rCOP approaches 1.20 times its 200dma then the law of probability says COP will soon reach an interim top and gravity will pull it back down, albeit temporarily.

Now after you bought COP at $100 a share (hopefully $100 is near its 200dma so at least you’re not buying it when it’s technically temporarily expensive), you sit and wait until rCOP hits 1.20 which indicates the stock is near its interim top. Let say the price is $140 at this point, you write a covered call option on it with a strike that’s let say 10% above current price (so strike=$154). At this point, the buyer of the option will pay you the option premium. You will then face one of the following scenarios:

1) The life-is-perfect scenario: COP continues to rise to reach an interim peak of $150 before calling it quits and go back down to $120 and next thing you know the option expires. Result: you have a very very big smile on your face because you feel good that COP keeps rising and you made money (on paper at least), PLUS you got the option premium as the icing on the cake.

2) The not so perfect but still pretty darn good scenario: COP starts rising quickly as soon as you wrote the option and broke the strike price on the upside. Result: the option holder exercises the option and pays you the strike price of $154 for the COP shares. You have a medium size smile on your face because in addition to making money on COP shares (realized profits) you also made money from the option premium. Then you immediately buy COP shares again to re-establish your long term position, unless of course you then determine to time it and wait until it comes back down near its 200dma before you re-establish the position (remember if a rCOP of 1.20 is considered expensive, then 10% above that should be considered even more expensive isn’t it?)

Now of course if COP shoots up like a rocket your re-purchase price could be higher then the strike at which you sold the shares but hey who said life is perfect ?

3) Now what if COP falls ? After you wrote the option COP starts falling to $90, then $80, then ….. Well, it proves that your entry point for COP might be a bit premature (or you’ve completely missed the direction of the market) but since COP never hits the strike so you retain the option premium but hey you still have your COP shares, which is exactly what your original intention was anyway; thus the option premium effectively reduced the cost basis of your COP shares. And if you lost your nerve and sell the shares, you would lose less money thanks to the cushion created by the premium.

In all these three scenarios, provided that your ORIGINAL strategy is long term buy-and-hold, ADDING a supplementary covered call strategy will enhance your potential returns without incurring additional risk.

But then of course you can buy/sell options the way anxvariety does and whether it is riskier or not compared to just buy/sell stocks really depends on how you look at it.

[anxvariety]

Awesome writing leung_lewis.. Hopefully people take the time to read it thoroughly, because I think covered call writing is right up your average piggington posters alley..

Powayseller, Maybe I mistyped.. but I didn’t mean to say that options are a safe place for a person to put money.. NOO way, like I said I had almost a -75% swing before stabilizing to the figures I posted earlier. If we ever hear someone pitch safe and volatility in the same sentence, lets grab all our valuables and run!

I was really tryign to answer the original question, in a little bit different approach.. but the idea is:
The options allow an investor get in on alot of upside for less money up front(leverage) VS. fronting alot of money to buying shares of the stock.. By doing this, you can use the rest of your money(the majority of your money) to buy CDs or gold or whatever you consider a safe place to park your money.

I was trying to show earlier in my example of the COP NOV 60 call option purchase VS. COP $60 stock purchase, that with 1/3rd the up front capital, the gain for the option holder was the same as the stock holder… the risk is that the option holder ends up with nothing if the company isn’t at their strike price by the expiration date.. but do you really want to wait it out long in COP if it dips to 40 for a couple of years anyways? Is Connoco Phillips going to flop? If so, I’d rather have options go to zero than my stock.

[Anonymous]

Chris Johnston

WOW, I debated whether to even respond to that!. Somehow you completely misunderstood the basis for my post. Maybe it was my fault, in how I entered it. First, there was a small joke in it.

Second, how would you equate a 42% YTD return to the return of the market as a whole, which is zero?

Thirdly, the stats in options are what they are. 90% of them expire worthless. This means that the holders of those have lost 100% of their investment. This ratio has been in place for decades. The people that make money trading options are those who write them. They gather the premium up front, and bank on the 90% expire worthless stats.

Please as someone who has been in this business for 20 years, I just implore you to use some caution in options trading. It is not high risk per se, but it is a very high failure rate due to what I stated above.

Also, they are not very liquid, you buy retail and sell wholesale when you trade them. Also, be careful of any brokers you deal with. Most of them only push their firms options recommedations. Very few if any of these are profitable over time, other than the commissions generated for the brokers.

The main point of my post was just to point out one of many things, that offer higher rates of return than conventional investments.

It does sound like you are being completely open and honest about your experience, which is one of the great things about this forum.

[anxvariety]

Whatever my tone, it’s intended to stirr up debate… but I will take repsonsibilty for it if it seems personal or insane. Thanks for taking the time to respond to my questions to you.

Almost 100% of milk cartons expire worthless… Unless you like drinking homemade curds.. I’d rather try and drink my milk long before the expiration… I don’t even feel comfortable drinking it a day before it expires! How many cars expire worthless? I don’t want to own a car when it expires.. how many people keep their car until it stops working? At least with options you know when the expiration is, and you can get away from them before that 90% period… sure maybe it’s hard to get away from them being down 25-50-75%.. but I am willing to cut my losses and try again. I definitely don’t want to own something that’s ‘expired’.

For the most part these aren’t options that I’ve picked out either.. like I’ve said, hopefully enough, I have been following Zeal’s reccomendations. Picking which to invest in, is sort of an art that I don’t have the time for with a job in another profession. Though, the FRO options that I bought&sold had 450-something%(.6->3.30) return were ones that I picked out… I’m going to call it beginners luck for now though! Because, I know in investing it’s not really about where you were or have been, more so where you end up, or down 😉

From Quoteland.com:

“I made my money by selling too soon.” -Bernard Baruch

“I have probably purchased fifty ‘hot tips’ in my career, maybe even more. When I put them all together, I know I am a net loser.” -Charles M. Schwab

[Anonymous]

Chris Johnston

Interesting analogy for the options expiration. To make it fully applicable you would have to factor in a rapidly shortening spoiling date on the milk. This would equate it to the time decay in option pricing. You would have to drink that milk at several times your normal rate of consumption, to consume it all before the ever shortening date. Options will be virtually worthless many days before the actual expiration in alot of cases. There are mathematical ways of doing this calculation using implied volatility. I am not sure what the implied volatility on milk spoilage would be!

One strategy that I used many years ago, was to load up on a ton of options that were way out of the money, the day before expiration. I did this when my research told me we had a high likelihood of a big trend day in one direction. When these hit, they were big payoffs. Overall, though that strategy does not work that well anymore.

I wish you luck with your options trading. I will drop the debate at this point. It does not seem I am doing a very good job of making my points. I have seen so many people go down this road in my career. If you are hooked up with a great trader, maybe it will work out ok.

Actually excercising the options does in some cases make a great deal of financial sense. This is especially true with complex options strategies, straddles, buttlerflies, strangles, etc…

BTW, selling to soon is what I do all the time. It is a great way of hitting a high % on your trades. Also, generally on my third car I do keep it until it stops working. It is a utility vehicle (currently an Expedition with 100k miles), that has no value except salvage on trade. I will just keep it until it no longer moves, in the meantime using it for hauling things around( like our horses).

Ironically, my first post was mostly intended as me poking fun at myself for the volatility in my trading service.

[powayseller]

anxvariety, I read Chris’ post earlier, and he did not say that options trading is irresponsible. Here is what he wrote:

“Well, If you want volatility, my daily trading service for Bond Futures has it, LOL! It does not however, have volatility that extreme, unless it is maxed out irresponsibly. With options you do risk the full amount, and hence get the big leverage.”

But then he said he only puts in 5% into any one trade. Plus he has stop losses, so he limits his exposure.

You and I are amateur investors, although you have more experience than me since I have never traded options. Perhaps you have more experience in trading overall. But I will defer to Chris, since he is a professional trader, and I know from finance courses that higher returns encompass higher risk. I do not believe in easy money of options.

While you got lucky with the COP option, if they had expired worthless, you would have lost all your money. I on the other hand still would have my COP shares, and if they ever came back above $60 purchase price, would make a profit. I could even lose a few dollars per share, but overall my risk is less so my potential for profit is less, and my potential for loss is also less.

There is a reason that Zeal puts the options into its Zeal Speculator newsletter, which they emphasize is for high risk traders and speculators. In the Zeal Intelligence newsletter (for conservative investors) they only recommend buying shares, i.e. long positions. No puts, calls, options, shorts.

Zeal was lucky that COP options worked out. If the market had turned against COP during the last downturn, or when the gas prices went back down, then those could have expired worthless too. I am reminded of RighSide, who is shorting LEND. Although the long term prospects for COP are good and for LEND are bad, when you buy shorts and options you have to be right on the price and the time. You have to hit TWO targets. So a much higher risk of being wrong. RightSide is taking a big chance on shorting, because LEND may not go down in the amount and in the timeframe he thinks.

Since 90% of options expire worthless, you have a 90% chance of losing ALL your money when you buy options. Pretty risky…

This was an interesting debate, and I thank all who participated.

[anxvariety]

Sometimes I wonder if you even read what I write! But then I read what I write, and I don’t blame you!!! 🙂 I never thought he said that..

“Well, If you want volatility, my daily trading service for Bond Futures has it, LOL! It does not however, have volatility that extreme, unless it is maxed out irresponsibly. With options you do risk the full amount, and hence get the big leverage.”

“have volatility that extreme” I’m assuming was was in response to the 3 highly profitable scenarios(including PCU) that I was referring to… since thats the post he was responding to.. if not, please show me the subject of “that” in the statement… I do not think those are irresponsible trades. If all he said was “options trading was irresponsible”, I would brush it off, because anyone, including someone that knows nothing about investment can tell that a statement that generalized is no way correct.

Powayseller, if you’re lucky the price of oil won’t crash.. There are lots of acclaimed investors and businessman saying it will, including Steve Forbes.. If it crashes you would be stuck in COP for a long time.. LET ME AGAIN, get back to the WHOLE REASON that I even mentioned options…. I do not have all of my money invested in COP options or any options. I have about 15% of my cash in options. The rest of my cash is in what I consider to be safe place..

“In the Zeal Intelligence newsletter (for conservative investors) they only recommend buying shares, i.e. long positions. No puts, calls, options, shorts.”

I’d appreciate if you’d show me where they say that they don’t reccomend it.. because they do share their option trades in the newsletter… of course all tips are going to have a disclaimer.

“While you got lucky with the COP option”

Powayseller, I haven’t gotten lucky.. I am still holding the options.. So I haven’t gottten lucky.. Do you think I’d be holding these options if it was a definite 90% chance of losing 100%??????????? I’m not saying I won’t lose 100%, because sure I might.. but I’ll address the very misleading 90% quote by Chris in the last paragraph.

“Since 90% of options expire worthless, you have a 90% chance of losing ALL your money when you buy options. Pretty risky…”

Powayseller, PLEASE read my last post.. When you are Chris says that 90% chance of losing all money.. it’s like saying that you have a 50% chance of crashing in a plane.. sure there are two outcomes, but that doesnt represent 50% probability… You msut also take into account the investor can sell the options at any time before expiration..

I hope Lueng_lewis responds to the 90% quote that being misleadingly(made up word?) tossed around..

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