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OK, getting over the flu bug & have some time on a Sat. (boy I sound old), ask me anything you want to know about trading and while I'm still awake between medication doses I'll try to help.
Thanks for doing this. I've been watching videos and reading up a bit on options trading. I'm starting to understand a little bit of it but still not enough to place my first paper trade. I'm still not sure how one can decide which stock/etf to trade. The videos from the site I was watching them on is run by this guy who teaches us about how to place trades depending on volatility and his site has a tracker telling you which stocks/etfs have the highest or lowest volatility. But I think you have to upgrade to the pro membership in order to use it. Since I'm still learning and just paper trading, I don't feel ready to shell out money... so I was wondering how would you find out what to trade on your own?
Are you being more cautious about the market and reducing your holdings of equities? What do you see for the next 6 months?
No, I do have hedges using options, however, they would be there if we were in the beginning of the bull market or not. In my trading positions, I'm actually pretty equity heavy. 90% overall.
In the next 6 months, I see us continuing to do as we've been doing. Trending up with small reversals & slight volatility. I do think by end of summer we will have some big swings. The market is pricing it in.
Thanks for doing this. I've been watching videos and reading up a bit on options trading. I'm starting to understand a little bit of it but still not enough to place my first paper trade. I'm still not sure how one can decide which stock/etf to trade. The videos from the site I was watching them on is run by this guy who teaches us about how to place trades depending on volatility and his site has a tracker telling you which stocks/etfs have the highest or lowest volatility. But I think you have to upgrade to the pro membership in order to use it. Since I'm still learning and just paper trading, I don't feel ready to shell out money... so I was wondering how would you find out what to trade on your own?
Great question, really it's just like regular stock trading. Find what you know. The more you know about it, the more you'll have information on how it trades and it's focus and if the pricing is realistic.
For example, I like AMZN. There was a reason I picked it. I followed the stock, checked out the fundamentals, did my own equity research and thought I would like to own it. From there, starting out I bought calls (simple straight forward) and waited. Like most...I lost out. Meaning I spent money, the stock never got to where I thought it would go and my time expired.
That taught me to re-evaluate my expectations. Learn my break-evens and the re-apply those lessons. I bought more calls, the stock (underlying) got to the strike+break-even. I exercised the calls and was the new owner of AMZN shares. I kept those shares and continued to ride the roller coaster, eventually repeating that again and again eventually adding additional strategies.
The hardest part is trying to determine if it's worth it. That is what you should be focusing on. How cheap/expensive are the options or the underlying stock.
The next MOST IMPORTANT part is structuring the trade. Make sure you get your trade to execute the way you want, and when setting up your exit position(s) make sure you're using the proper order entry.
1. What starting equity allocation do you advise (or have seen advised if you haven't done the actual advising) for clients who are early retirees (with no pension) in a market environment like what you are seeing now?
2. Why are puts/calls/options so difficult to understand? ("2 + 2 = meow? hmroooo?")
3. What's the easiest way for index and fund investors to hedge the market (and should they)?
I hope your flu flies away as fast as my portfolio dropped on Friday!
1. What starting equity allocation do you advise (or have seen advised if you haven't done the actual advising) for clients who are early retirees (with no pension) in a market environment like what you are seeing now?
2. Why are puts/calls/options so difficult to understand? ("2 + 2 = meow? hmroooo?")
3. What's the easiest way for index and fund investors to hedge the market (and should they)?
I hope your flu flies away as fast as my portfolio dropped on Friday!
First thank you for the well wishes. The Tamiflu is working wonders now.
1) It will all depend on risk tolerance. Again, we're talking about trading AND investing accounts. Trading accounts, need to be ready to weather volatility. I would say, for a newly retired 70 year old who has a moderately high tolerance is 70% equity, 20% mutual funds/index funds, 10% cash. Someone who is VERY risk embracing, with the right risk tolerance 95% equities (using options)
*These again are TRADING accounts, they should be balanced & separate from investment/retirement accounts that are diversified and allocated in a way to continue to generate long-term returns & income. For those individuals, high performing blue chip stocks...using covered calls with MAYBE 5% other option strategies such as writing puts for certain index options.
2) This is a great question. They can be difficult if one is trying to do an exotic trade, and to be honest they are fun. They are sexy. They are what you hear on the floor of the CBOE & movies. However, and I've been doing this a while, the most successful clients (and it's a strategy I copied for myself) have been plain jane covered calls & cash secured puts. Again, it's not sexy and not rocket science smarts needed. They are one of the most basic and straight forward strategies. But I've seen several and had several clients who came to me, beating the market (S&P) 15/18 years. It was ridiculous.
What specific questions do you have about them?
3) Depending on the index and the time frame, you several options. You can hedge the entire portfolio with treasury hedges or other index options. If like most you will simply buy index puts for downside protection and sell index calls for income in down markets. Simple spread options are the other way which I personally love because they are defined risk/reward trades. You know how much you make if the market goes up, how much you lose if it goes down, and how much the options are worth in both cases.
I would say if you're looking to "insure" the portfolio, spread index options are a good way to hedge, or options on the DIA/QQQ/SPY depending on how your portfolio is allocated and risk management style will be a little cheaper.
Regarding Q1: Assume allocation is for a portfolio to be used for retirement, does not contain individual stocks, just mutual funds and index ETFs, and set the age of the early retiree younger (under 60). You made a comment in another thread that you would suggest anyone entering or close to retirement in an environment like what we have now to be "mostly" in conservative investments, but didn't define what "mostly" meant. Hence my question about % advised.
Regarding Q2: I don't have specific questions (yet) since I realized I wasn't really grokking the seemingly straightforward explanation (or the accompanying video) on Investopedia, so I retreated to ponder something easier, like quantum physics or the meaning of life.
Regarding Q3: Index puts and Index calls - I don't understand puts and calls, the terminology confuses me, and that is part of the problem, if not most of the problem. Any suggestions for websites or resources that can explain it like I'm 5?
Last edited by lottamoxie; 02-03-2018 at 08:36 PM..
For early retiree's who under assumption have at least 20 years life expectancy, yes if that individual is retiring I would be in mostly mutual funds and ETF's. By this I mean nothing like Euro index currency options or speculative equities. Any of the index ETF's or diversified mutual funds (80%) with a good (15%) cash/cash equivalents for emergencies would be my recommendation. Writing covered calls on any equities that I hold (as long as they are well written on healthy positions would also be acceptable). The 5% left would be for any chasers you would want to use in this account or in CD's/bond funds for set withdrawal scenarios.
For options, you have to think of it having two sides. Rights & Obligations. You can buy puts (which is downside protection for any asset or bearish) or sell puts which is bullish (which is upside potential of any asset) If you buy puts you are BUYING the right to put the asset to someone at a specific price. Ex. XYZ is currently at 100. You feel that in the next 90 days it will go to 50. You buy a 90 day put for the 100 strike. This gives you the RIGHT to put that security to someone at 100, when the underlying is trading at 50, making the difference of 50 (less any commissions). If you sell the put, same 90 days you think the stock is going to go up, but want to wait for it to break out and only buy at a price higher than it's current. You can sell the put, and now have the OBLIGATION to buy the stock at that price within the stated time period. Ex. XYZ at 80, you think it can go to 100 and if it does it will spike to 125. You don't want to buy until it does this within the next 90 (could be any time-frame), due to technical indicators or macro-news. You sell the put for $20 premium/per contract. Meaning you gain $20 for every contract (assuming it's 100 sh/contract). If you want to purchase 200 shares of XYZ, ONLY IF the stated requirements for your trade are met, then that's $40 upfront to you. Let's assume it doesn't hit the 100 strike. You keep the premium, and after the option expires you write another 2 contracts for more premium. You are gaining "income" for waiting for your shares. This is also the same as a limit order, but YOU get paid for waiting for it to execute.
Let's now say, it does hit 100, you're assigned and your account is debited for the 200 shares, and you now own them. Let's say you were right, and it spikes to 125. You now sell your shares collecting the difference less your "premium".
With calls it's the same on the other side. RIGHTS/OBLIGATIONS. Long calls or buying calls mean you think the underlying is going to go up. You only want to buy at a certain price, b/c the name of the game is buy low & sell high. Buying ITM(In The Money) calls is EXPENSIVE. So you guesstimating that XYZ currently at 100 is going to go to 125. You PAY $5/contract (again each contract being 100 shares) for the RIGHT to buy 100 shares @ 100. To break even you need XYZ to be at 105, (100 strike + $5 premium). Let's say it does, XYZ is now @ 125. You exercise your RIGHT and buy @ 100, take ownership of the shares and can either continue to hold or sell making the profit (difference 125-100).
Selling the call is bearish, in that the main objective is you think that XYZ is either going down and you want to collect premium while it does...OR you hold the underlying and want to get paid while you hold it to you specified exit point, which is selling a covered position.
Example. You own the XYZ shares @ 100. It moved to 125, but then retraced and has been holding at 105. You think it will move sideways for a bit (next 90 days) and want to gain income on that position while it does and if it does spike you are fine with it being taken from you. You write(sell) the 130 call. You collect $20/contract for doing so. You now have the OBLIGATION that if XYZ rises to 130 you give your shares away at that price. Let's say it does in 60 days. It hits 130, you get assigned and your shares are taken. You keep any premium, less any commission, less your cost basis. The great thing is though...while writing your calls, you have also been knocking down your cost basis.
Tell me if you're confused...I'm happy to help. I used shares, but indexes work the exact same. If you are bullish on .DJI you can either buy calls or sell puts. Calls give you the right you pay for to buy in at a certain price. Puts (sold) give you the obligation to BUY at a certain price
Calls sold means you have an obligation to give your cash (index) away less any premium you collected for the sold calls, and bought puts means if the index goes down you can put it to someone at a higher value that what it is now. For example people who were long puts on the .DJI on Friday made a killing. Let's say someone had the 270 DIA put (long). The DIA is the ETF tracking the dow, since it ended at 25,520, DIA closed at 255. That person can put that to the opposite person who sold that 255 put, and make them pay the difference of 15 (15x100xper contract well say 1), so $1500 less commissions.
To be honest, CBOE has a great definitions page under the investor learning section.
Let me know if I went to fast, or something didn't make sense.
Last edited by txgolfer130; 02-03-2018 at 09:10 PM..
For early retiree's who under assumption have at least 20 years life expectancy, yes if that individual is retiring I would be in mostly mutual funds and ETF's. By this I mean nothing like Euro index currency options or speculative equities. Any of the index ETF's or diversified mutual funds (80%) with a good (15%) cash/cash equivalents for emergencies would be my recommendation. Writing covered calls on any equities that I hold (as long as they are well written on healthy positions would also be acceptable). The 5% left would be for any chasers you would want to use in this account or in CD's/bond funds for set withdrawal scenarios.
Ok, when you said "put money in mostly conservative funds" I was thinking along the lines of, for example, 45% in broad equity index funds and the rest in bond funds and cash/equivalents; I already assumed only using index funds and mutual funds. But 80% equity allocation in index and MFs is not what *I* consider "conservative," so color me surprised.
This is why it's important to get on the same page in terms of semantics and dial-in on what you're actually saying. As an industry professional you're at the 3D chess table and some of us are playing checkers.
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