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Dow 11,000 — Too Much Cheering

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  • Mon, Apr 12, 2010 - 11:28pm

    #1

    machinehead

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    Dow 11,000 — Too Much Cheering

The DJIA’s marginal close above 11,000 has attracted headlines in general-interest newspapers. For example:

The Dow Jones industrial average, a closely watched measure of the financial world, closed above 11,000 points on Monday for the first time since the start of the financial crisis.

The move was the latest marker in a rally that has brought Wall Street back from the brink. It came as investors welcomed a long-awaited rescue plan for Greece and amid signs that American companies were poised to report strong first-quarter profit. By the end of trading, the Dow had risen 8.62 points, or 0.08 percent, to 11,005.97 — its highest level since September 2008.

“Nobody ever thought we’d ever get near this level this fast,” said William J. Schultz, chief investment officer for McQueen, Ball & Associates. “Lacking any negative news out of companies, the rally will likely continue.”

If you’re long, this is not a welcome development. From a contrarian standpoint, the last thing you want is media cheerleading over a rather weak move up, on the announcement of a large injection of liquidity. If this were a healthy market, the Greek bailout news should have sent it up 200 points.

One analyst I respect — Guy Lerner — has an article posted at Safehaven.com. He describes how all the wrong (clueless) people are short-term bullish, while all the right (insider) people are bearish.

http://www.safehaven.com/article/16386/investor-sentiment

It doesn’t necessarily mean the cyclical bull market is over. But I sure wouldn’t be adding on to positions now. Taking investment advice from the Mainstream Media is a proven road to ruin. When they say ‘buy’ — run for your life! Or scarf up some gold, just to spite them.

 

 

 

  • Mon, Apr 12, 2010 - 11:35pm

    #2
    Peak Prosperity Admin

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    Re: Dow 11,000 — Too Much Cheering

Buy or Perish!

  • Tue, Apr 13, 2010 - 12:25am

    #3
    Peak Prosperity Admin

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    Re: Dow 11,000 — Too Much Cheering

Buy, then Perish!

  • Tue, Apr 13, 2010 - 03:38am

    #4
    Peak Prosperity Admin

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    Re: Dow 11,000 — Too Much Cheering

Buy , Sell what the hey

 

Just send your money directly to Goldman or JPM and be done with it.

that way they can keep doing God’s work

 

 

 

  • Tue, Apr 13, 2010 - 03:54pm

    #5
    Peak Prosperity Admin

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    Re: Dow 11,000 — Too Much Cheering

[quote=SagerXX]

Buy, then Perish!

[/quote]

Buy right, sell right.

Pay the required taxes.

Throw a party. (Get ready for Puts)

Since March 3rd, Goldman is up $20 – with a corresponding ~$17 move in the October $160 Call options. In at $9 per contract, out at $25 – 177% ROI based on the movement the market gave you. Without any concern for why it is moving – only that it moved.

Beat them at their own game.

 

MH –

Here’s where Lerner and I disagree.  Market neutral people are ALWAYS right.  He indicts the short term Bulls unfairly.  If those short termers are in and know that the market is topped AND they get out while it is still rising (see my Goldman trade above), then they are 100% correct.  He also heaps too much praise on the long term Bears – they are missing excellent trading opportunities (such as the GS trade above) by being positioned (also 100% correct) for a longer term Bearish bias.

Don’t take sides – take what the market gives you, up or down, and you will always be on the winning side of a trade.

Assuming of course you have the discipline to get out of a trade that backs up on you and not dig in your heels by convincing yourself you are “just a little early”.

  • Tue, Apr 13, 2010 - 04:25pm

    #6
    Peak Prosperity Admin

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    Re: Dow 11,000 — Too Much Cheering

[quote=Dogs_In_A_Pile]

Since March 3rd, Goldman is up $20 – with a corresponding ~$17 move in the October $160 Call options. In at $9 per contract, out at $25 – 177% ROI based on the movement the market gave you. Without any concern for why it is moving – only that it moved.

Beat them at their own game.

[/quote]

Buying high delta options is not exactly a low risk trade.  If the market went the other way you could easy have lost 75% or more of your “investment”.

  • Tue, Apr 13, 2010 - 05:04pm

    #7
    Peak Prosperity Admin

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    Re: Dow 11,000 — Too Much Cheering

[quote=goes211]

[quote=Dogs_In_A_Pile]

Since March 3rd, Goldman is up $20 – with a corresponding ~$17 move in the October $160 Call options. In at $9 per contract, out at $25 – 177% ROI based on the movement the market gave you. Without any concern for why it is moving – only that it moved.

Beat them at their own game.

[/quote]

Buying high delta options is not exactly a low risk trade.  If the market went the other way you could easy have lost 75% or more of your “investment”.

[/quote]

Joel –

If the market had gone the other way I would have closed the position with a relatively small loss and moved on.

It wasn’t an “investment”, it was a “trade”.  There is a huge difference.  I “trade” to generate revenue to pay off debt, donate to charity and buy gold and silver.  Investing is a completely different ball game than trading and too many people view them as one and the same (incorrectly IMO). 

The fact that there was a large spread (delta) on the Bid/Ask has no bearing on whether or not a trade is risky.  A large spread generally means price volatility and movement and that is what I am looking for.

The only thing that makes a trade risky is the action (or inaction) of the person hitting the “Enter” button.  When I get into a “trade” I expect it to go my way almost immediately.  Depending on the time interval of the chart(s) I used to enter the trade, I may give it a day or two to move my way.  If it doesn’t start going my way almost immediately I will close it.  My expectation for GS back on 3 March was to the upsde so I bought Call options.  It began moving my way immediately and I began looking for an excuse to get out.  15 days later on 18 March I was happy with a 177% ROI so I sold the contracts and closed the position.

You eliminate all risk from a trade by developing the discipline to trade correctly.  Trading correctly does not necessarily mean that the trade is always profitable.  If you get into a trade that backs up on you, the correct and disciplined thing to do is to close the trade.  You may lose a little money, but you DID the trade correctly – you closed it.  By focusing on “trading correctly” you reduce the size of your losses and that is how you maximize profits in the long run.

I honestly don’t think trading options isn’t any more risky than other trading approaches, you just have to be aware of the time element and expiration date and trade them appropriately and correctly.

Just my approach……

  • Tue, Apr 13, 2010 - 06:38pm

    #8
    Peak Prosperity Admin

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    Re: Dow 11,000 — Too Much Cheering

[quote=Dogs_In_A_Pile]

[quote=goes211]

[quote=Dogs_In_A_Pile]

Since March 3rd, Goldman is up $20 – with a corresponding ~$17 move in the October $160 Call options. In at $9 per contract, out at $25 – 177% ROI based on the movement the market gave you. Without any concern for why it is moving – only that it moved.

Beat them at their own game.

[/quote]

Buying high delta options is not exactly a low risk trade.  If the market went the other way you could easy have lost 75% or more of your “investment”.

[/quote]

Joel –

If the market had gone the other way I would have closed the position with a relatively small loss and moved on.

It wasn’t an “investment”, it was a “trade”.  There is a huge difference.  I “trade” to generate revenue to pay off debt, donate to charity and buy gold and silver.  Investing is a completely different ball game than trading and too many people view them as one and the same (incorrectly IMO). 

The fact that there was a large spread (delta) on the Bid/Ask has no bearing on whether or not a trade is risky.  A large spread generally means price volatility and movement and that is what I am looking for.

….

I honestly don’t think trading options isn’t any more risky than other trading approaches, you just have to be aware of the time element and expiration date and trade them appropriately and correctly.

Just my approach……

[/quote]

Dogs,

I am certainly aware that this was a speculative trade which is why I refered to it as a “investment” Laughing.  I have worked for options market makers for most of my adult life and would certainly not want to discourage retail investors from trading options.  I am just pointing out that your %177 ROI in a little over a month was hardly a riskless investment.  You had an opinion on market direction and took a leverage bet.  You won this time but may not be so lucky in the long run.

BTW the delta I was refering to was not the bid/ask spread but the option greek called delta.  There are 5 common option greeks and several others that are less common:

  • delta refers to change in option value vs. change in underlying (derivative of price with respects to underlying)
  • gamma refers to change in option delta vs. change in underlying (second derivative of price with respects to underlying)
  • vega refers to change in option price vs. change in option volatility (derivative of price with respects to volatility)
  • theta refers to change in option price vs. change in time (derivative of price with respects to time)
  • rho refers to change in option price vs. change in interest rates (derivative of price with respects to interest rates)

From the price move you describe $20 stock move vs. $17 option move I can back of the envelope assume that the average delta of this option over your move is somewhere around 85 and probably significantly higher by the time you sold it.  I am guessing it was “in the money” (above 50 delta) when you bought it.

Lets assume you are a disciplined speculator, and will get out rapidly if the trade starts to move against you.  If GS stock moves from $160 at time of option purchase, to $159 and you decide to cut your losses, (assuming a 55 delta 160 Call) your option is now only worth around $8.50 for a loss of $.50 or 5.5% of your investment.  Clearly a one dollar move against you can happen quite quickly, much quicker than a $20 move in your favor.  Another consideration is that you will lose on the wide bid/ask spread twice, but firms like the one I work at, will be more than happy to oblige if you so choose.

All I am trying to point out is that OPTIONS are LEVERAGE and not for the faint of heart.

  • Tue, Apr 13, 2010 - 07:14pm

    #9
    Peak Prosperity Admin

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    Re: Dow 11,000 — Too Much Cheering

[quote=goes211]

Dogs,

I am certainly aware that this was a speculative trade which is why I refered to it as a “investment” Laughing.  I have worked for options market makers for most of my adult life and would certainly not want to discourage retail investors from trading options.  I am just pointing out that your %177 ROI in a little over a month was hardly a riskless investment.  You had an opinion on market direction and took a leverage bet.  You won this time but may not be so lucky in the long run.

BTW the delta I was refering to was not the bid/ask spread but the option greek called delta.  There are 5 common option greeks and several others that are less common:

  • delta refers to change in option value vs. change in underlying (derivative of price with respects to underlying)
  • gamma refers to change in option delta vs. change in underlying (second derivative of price with respects to underlying)
  • vega refers to change in option price vs. change in option volatility (derivative of price with respects to volatility)
  • theta refers to change in option price vs. change in time (derivative of price with respects to time)
  • rho refers to change in option price vs. change in interest rates (derivative of price with respects to interest rates)

From the price move you describe $20 stock move vs. $17 option move I can back of the envelope assume that the average delta of this option over your move is somewhere around 85 and probably significantly higher by the time you sold it.  I am guessing it was “in the money” (above 50 delta) when you bought it.

Lets assume you are a disciplined speculator, and will get out rapidly if the trade starts to move against you.  If GS stock moves from $160 at time of option purchase, to $159 and you decide to cut your losses, (assuming a 55 delta 160 Call) your option is now only worth around $8.50 for a loss of $.50 or 5.5% of your investment.  Clearly a one dollar move against you can happen quite quickly, much quicker than a $20 move in your favor.  Another consideration is that you will lose on the wide bid/ask spread twice, but firms like the one I work at, will be more than happy to oblige if you so choose.

All I am trying to point out is that OPTIONS are LEVERAGE and not for the faint of heart.

[/quote]

Joel –

I understand your perspective better now.

I can tell you though, that in the approach Cat and I have developed with our trading this was not an “opinion”.  I knew with certainty that GS was going to move up.  That speaks to the discipline I was talking about.  Why would I ever get into a trade position based on an “opinion”?  I understand the distinction you are making, but it wasn’t an opinion or a “leveraged bet”.  GS had only one direction to go once I got in – otherwise I was out.  I won because I expected to win and I traded correctly – there is no potential for a long term big loss unless I break discipline.

I don’t concern myself with beta, delta, or any other “metric”.  The only thing I look at is upcoming events (earnings, dividend payment dates, splits, etc – events that have the potential to move the price of the underlying equity), a handful of technical indicators with an awareness of where in the trading year I am.  As far as I’m concerned, all of that other stuff is noise and I have yet to find a useful application.  Remember, what I am primarily looking for is a stock price that moves.

Using your example, I am not concerned with a 5.5% “loss” because I get to keep 94.5% of my principal.  Trust me, when you add up a handful of 5.5% “losses” against 40-60% (typically – granted 177% is not typical, but at the same time, it is not unexpected with GS this time of the year) ROI trades, the scales tip heavily in my favor.  The Bid/Ask spread is also not a concern for the same reason.  I look at the spread as the cost of doing business.  When GS took off in this trade, I made up the spread in less than a day.  I bought at the money (or within a dollar of in the money IIRC) – again, as volatile as GS is, and by buying the October contracts, I bought plenty of time and insulation against price time decay.

I hear what you are saying about losing twice on the spread, but trust me, firms like yours have paid me far more money on “good trades” than they have taken from me via the spread when I closed a trade that wasn’t going the direction I expected.  Cool  Remember, I define a good trade as a trade done correctly, not necessarily a profitable trade.

Your last sentence is on target – although I don’t view options as leveraged trades because I am not leveraging against anything.  I have never exercised the options and I rarely hold the underlying equity for this type of trade.  I just buy and sell the options.  What you call “faint of heart” I call a developed, disciplined and practiced trading approach – an approach that took almost 6 years of study and practice to develop.

Great discussion BTW, thanks.

Now, back to the rock pile…………….

  • Tue, Apr 13, 2010 - 07:35pm

    #10
    Peak Prosperity Admin

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    Re: Dow 11,000 — Too Much Cheering

Goes211 wrote:

BTW the delta I was refering to was not the bid/ask spread but the option greek called delta.  There are 5 common option greeks and several others that are less common:

  • delta refers to change in option value vs. change in underlying (derivative of price with respects to underlying)
  • gamma refers to change in option delta vs. change in underlying (second derivative of price with respects to underlying)
  • vega refers to change in option price vs. change in option volatility (derivative of price with respects to volatility)
  • theta refers to change in option price vs. change in time (derivative of price with respects to time)
  • rho refers to change in option price vs. change in interest rates (derivative of price with respects to interest rates)
  • Interesting stuff, thanks for the explain. Wondering if this grouping of Greek values is woven together in some form of indicator that might be used in timing buys or sells in the sector or market in general?

     

     

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