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Old 02-20-2012, 10:58 AM
 
Location: Conejo Valley, CA
12,167 posts, read 9,507,163 times
Reputation: 3933
Quote:
Originally Posted by ML North View Post
Equity risk is simply the risk that a given equity position will decline in value.
This is fundamentally different than:

risk of given outcome = (probability of given outcome) x (magnitude of consequences in given outcome)

The above is not limited to "declines" and defining a probability function by just looking downward makes little sense.

Quote:
Originally Posted by ML North View Post
But, you've repeatedly railed against the very concept that you're employing.
Hogwash, are you just ignoring my comments at this point? In my last response you can find this:

" My point is not to disregard probability, but rather you can never have definite information about probabilities and so any trade that requires such definite knowledge to make sense (in terms of expected value) is a poor one. "

Not railing against the use of probabilities at all, instead I've been noting (the entire time) that one has to discount the probabilities by your ignorance factor. This was brought up in the context of your comments about calls, your argument depends on knowing that a particular equity has a "very low probability of a significant decline". You'd never know that, therefore covered calls are always less attractive, from your point of view, than straight longs.

Quote:
Originally Posted by ML North View Post
And there's really not any reason to expect that your compass is any better than those of the millions of others in the marketplace.
Right, so as I said before you're just not getting what I'm saying. My entire argument here is basically that my compass, indeed everyone's compass, is a terrible instrument and one should never act with the assumption that it actually works well.

Thinking in terms of vague probabilities is fine, thinking that you can actually know which market events have "very low probability" is foolishness.
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Old 02-20-2012, 11:02 AM
 
Location: Conejo Valley, CA
12,167 posts, read 9,507,163 times
Reputation: 3933
Quote:
Originally Posted by dhanu86 View Post
I wouldn't keep my money in a broker if its not making atleast 10% monthly return with minimal effort. For that I rather buy a farm and do farm work.
Nice fantasy you have there, but there isn't a single fund that has achieved a 10% monthly return on any sort of consist basis. At that rate of return it would take only 10 years to turn $10,000 into ~$26 million and within 20 years you'd have more than the entire GDP of the nation.
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Old 02-20-2012, 11:32 AM
 
Location: Wilkinsburg
1,661 posts, read 1,151,169 times
Reputation: 952
Quote:
Originally Posted by user_id View Post
This is fundamentally different than:
risk of given outcome = (probability of given outcome) x (magnitude of consequences in given outcome)
No, it's the same. Equity risk, being defined as the risk of an equity instrument declining in value, will most impact a portfolio when it happens often (frequency) and to a great extent(magnitude).

There is generally a correlation between frequency and magnitude (known as a probability distribution), so the problem is not minimizing just frequency or just magnitude, but rather finding the optimization of the two that results in the smallest total risk. And for that very reason, a trade with a limited downside is not necessarily less risky than a trade with a possible 100% downside. It could be, but it depends on a variety of characteristics of the underlying, including volatility.

Quote:
Originally Posted by user_id View Post
The above is not limited to "declines" and defining a probability function by just looking downward makes little sense.
It makes perfect sense. A lot of investors are willing and able to accept little to no return in exchange for protection of principal.

Quote:
Originally Posted by user_id View Post
Hogwash, are you just ignoring my comments at this point? In my last response you can find this:

" My point is not to disregard probability, but rather you can never have definite information about probabilities and so any trade that requires such definite knowledge to make sense (in terms of expected value) is a poor one. "
Choosing to make a well-hedged option play to limit the downside exposure because it is low risk carries the implicit assumption that the upside will occur more often than the downside.

And again, I'm completely fine with making that assumption. But making such an assumption is completely inconsistent with arguing that making a similar assumption for a long position is foolish.

Quote:
Originally Posted by user_id View Post
This was brought up in the context of your comments about calls, your argument depends on knowing that a particular equity has a "very low probability of a significant decline".
It makes much more sense to consider the relative probabilities between a series of potential trades, and looking a volatility would be a decent way to determine if one stock is more or less likely to make a large move than another, in the absence of some type of external event.

Quote:
Originally Posted by user_id View Post
You'd never know that, therefore covered calls are always less attractive, from your point of view, than straight longs.
I still disagree. If an investor is only concerned with principal protection, a covered call is going to be more attractive to that person than a simple long.
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Old 02-20-2012, 11:35 AM
 
Location: Wilkinsburg
1,661 posts, read 1,151,169 times
Reputation: 952
Quote:
Originally Posted by user_id View Post
Nice fantasy you have there, but there isn't a single fund that has achieved a 10% monthly return on any sort of consist basis. At that rate of return it would take only 10 years to turn $10,000 into ~$26 million and within 20 years you'd have more than the entire GDP of the nation.
Yeah, 314% annualized return. Anyone producing a consistent return of that magnitude would be managing a lot of money for a lot of people and would be very well known. Hell with that type of return, I could retire next year!
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Old 02-20-2012, 02:43 PM
 
5,079 posts, read 4,709,083 times
Reputation: 1657
Quote:
Originally Posted by dhanu86 View Post

I did covered calls when I started and I made money, then calls like I explained above.

The only risk I had that made me stop covered calls is less profit I was making and less leverage I could have compared to bull-put-spreads and bear-call-spreads which are even safer and cheaper.

Now I've developed a secret weapon from all I learned in options. So my advise is don't think u need to buy stock to use options and be covered.

we found that covered calls were good but offered the least ROI, and the more subsequently advanced the stradegy, the even less risky it is and less amount of money it ties up.

So don't be afraid to advance and yes options work very well. Don't do the lazy thing and keep doing covered calls. Master 1 leg stradegies, then 2 leg, then 3 leg etc with trading options and don't tie money into stocks unless sometimes you sell a put and it gets exercised.. then u immediately trade it. But learn 2 and 3 legs.
Would you care to share your secret weapon?

Not all investors can get approved for naked puts, or 2-3 leg spreads. I know someone from Etrade who had a high net worth, good job, etc. and could not get level 2 for spreads.

So, to skip covered calls, and go to long calls or puts, or beyond that, to spreads requires them to meet certain equity requirments, depending on who the broker is. Since straight calls, or puts, can lose 100% if you are not right on the direction and the timing, they carry more risk, and well, the Op's broker may not approve them for spreads and naked puts.

--------------------
If the buy point of a stock lets you in near the bottom (of a trading range, a channel, or whatever) then selling covered calls, according to alot of people (not just me), is a conservative strategy because it lowers your cost basis.
If the stock moves like paint drying then the covered calls can become weekly, or monthly income, plus the dividend the stock might pay.

You don't close your eyes and just pick a stock and sell covered calls.
It is not that simple.

I own Cisco and have been selling weekly calls, for many, many months. While the stock moves around, the position is putting cash into my account. Cash that I would otherwise not have going into my account.
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Old 02-23-2012, 07:56 AM
 
Location: Murphy, NC
2,887 posts, read 4,696,019 times
Reputation: 1127
Quote:
Originally Posted by user_id View Post
Nice fantasy you have there, but there isn't a single fund that has achieved a 10% monthly return on any sort of consist basis. At that rate of return it would take only 10 years to turn $10,000 into ~$26 million and within 20 years you'd have more than the entire GDP of the nation.
There is a broker that does something special, they're interagted with 50 or 100 subsciption portfolios, one of those subsciptions ($100 month) have your account automatically make the trades they do in their portfolio. And they consistantly make you 5-15% return each month and have for the past few years. They use the whole S&P or someone like that. So you open an account with that broker and pay for that subsciption. Their stradegy is simple and they use the same one. I personally don't use it because I do good myself and have fun with it. I pretty much have a different list of option stocks every week except for ones which fall through my filter more frequently.
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Old 02-23-2012, 08:36 AM
 
Location: Murphy, NC
2,887 posts, read 4,696,019 times
Reputation: 1127
Quote:
Originally Posted by howard555 View Post
Would you care to share your secret weapon?

Not all investors can get approved for naked puts, or 2-3 leg spreads. I know someone from Etrade who had a high net worth, good job, etc. and could not get level 2 for spreads.

So, to skip covered calls, and go to long calls or puts, or beyond that, to spreads requires them to meet certain equity requirments, depending on who the broker is. Since straight calls, or puts, can lose 100% if you are not right on the direction and the timing, they carry more risk, and well, the Op's broker may not approve them for spreads and naked puts.

--------------------
If the buy point of a stock lets you in near the bottom (of a trading range, a channel, or whatever) then selling covered calls, according to alot of people (not just me), is a conservative strategy because it lowers your cost basis.
If the stock moves like paint drying then the covered calls can become weekly, or monthly income, plus the dividend the stock might pay.

You don't close your eyes and just pick a stock and sell covered calls.
It is not that simple.

I own Cisco and have been selling weekly calls, for many, many months. While the stock moves around, the position is putting cash into my account. Cash that I would otherwise not have going into my account.
I'm sure he can get a margin account, I would google the best brokers for that and call them, that should be one the goals, but u don't even need one to use the same principle and grow the account, just at a slower pace. So forget 3 or 4 leg. I actually find myself not entering into 3rd leg because my homework was so well done that I don't need it. Sometimes its better to get in, get out, move on and keep the value of ur account going up and up each week because the more u have, the more u can make.

With experience u can make money using practically any option stock, so long as u understand enough stradegies, give it the right amount of time, pay minimum for it, keep an eye on it and make sure u did ur homework. I only use one right now because I think its the best I've come across. My secret weapon is a secret, but I'll say it involves using a 200 character formula in an excel worksheet so that I know how much I make if the stock expires at W X Y or Z, that makes it easy to make quick decisions and running like a clock.
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Old 02-23-2012, 08:52 AM
 
Location: Wilkinsburg
1,661 posts, read 1,151,169 times
Reputation: 952
Quote:
Originally Posted by dhanu86 View Post
There is a broker that does something special, they're interagted with 50 or 100 subsciption portfolios, one of those subsciptions ($100 month) have your account automatically make the trades they do in their portfolio. And they consistantly make you 5-15% return each month and have for the past few years. They use the whole S&P or someone like that. So you open an account with that broker and pay for that subsciption. Their stradegy is simple and they use the same one. I personally don't use it because I do good myself and have fun with it. I pretty much have a different list of option stocks every week except for ones which fall through my filter more frequently.
I don't care what the strategy is or who is executing it. No one making 5-15% monthly is going to sell their services for $100 per month.

And in the off-chance that an investor has been producing those returns, then he is likely taking excessive risks that will eventually catch up with him.
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Old 02-23-2012, 09:10 PM
 
Location: Murphy, NC
2,887 posts, read 4,696,019 times
Reputation: 1127
Quote:
Originally Posted by ML North View Post
I don't care what the strategy is or who is executing it. No one making 5-15% monthly is going to sell their services for $100 per month.

And in the off-chance that an investor has been producing those returns, then he is likely taking excessive risks that will eventually catch up with him.
Its the convenience people pay for, not any rocket science behind it. Welcome to AOS Inc. | Securities, Options & Futures Broker the newsletter I'm talking about is called spreadthetrend u should see it on the list in that link. I haven't used it but found it interesting.
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Old 02-23-2012, 09:24 PM
 
Location: Conejo Valley, CA
12,167 posts, read 9,507,163 times
Reputation: 3933
Quote:
Originally Posted by ML North View Post
No, it's the same.
No, still not the same. In one case you're talking about "risk of a down-turn" and in the other you're talking about the "risk of a given outcome".

Anyhow, at this point you're not even responding to the points I'm making despite multiple attempts to correct your distortion of my claims.

One thing about the markets that I like is that everyone can think you are wrong, distort your positions,etc and it just doesn't matter. Only your bottom line matters.
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