4% Return in 25 Days! Options Trade

[competentone]

Originally Posted by trader220

Be careful using the word "people" the markets pricing is not really based on retail or people.

What is it based on then?

If you are going to say "computer programs," then I'll ask, wasn't it "people" who wrote the programs that make the trades?

[trader220]

Looking at the trade and saying 4% over 17 days is enough is not any real analysis of the trade. You could easily go out and find trades which have the potential to give you a higher return. If you look at it in the context of the amount of premium you would have collected on 17 days over the last 12 months you might say 4% is not enough. Incidentally I am not sure where your 4% comes from since your true risk is the 85 dollar price in the stock less the 3 and change you collect. You’re putting up 85 x100 in stock cost.

[trader220]

Originally Posted by competentone

What is it based on then?

If you are going to say "computer programs," then I'll ask, wasn't it "people" who wrote the programs that make the trades?

I tend to think of the term "people" as a retail invetors sitting around, I generally dont refer to institutional business as "people"

In my context "people" being retail investors dont impact the market in a direct way enough to be considered.

[jyl]

Kind of tangential (well, very tangential) but retail investors this year have been single-minded. The vast majority of fund flows have been into bond funds and out of money markets. Equity funds have gotten little, save a bit to emerging markets equity.

I am not a fixed income guy. Any thoughts on the bond markets?

[competentone]

Originally Posted by trader220

Looking at the trade and saying 4% over 17 days is enough is not any real analysis of the trade. You could easily go out and find trades which have the potential to give you a higher return. If you look at it in the context of the amount of premium you would have collected on 17 days over the last 12 months you might say 4% is not enough. Incidentally I am not sure where your 4% comes from since your true risk is the 85 dollar price in the stock less the 3 and change you collect. You’re putting up 85 x100 in stock cost.

I'm not really following you.

First "the trade" isn't over until the option contract expires, or my shares are taken @$85. If FCX drops and I keep my shares at expiration, "the trade" isn't over until I sell the shares at some point in the future.

I'm not sure what you mean by "your true risk is the 85 dollar price in the stock less the 3 and change you collect"? The $85 (actually $84.84) to buy the shares represents the capital that could have been invested and earning a return on something else. It is "at risk" in that it can drop in price -- maybe even all the way back to the $17 range we saw last December; maybe even to zero if some huge accounting scam was revealed at the company -- but I don't expect that to happen. The $85 ($8500 per contract) is at some risk of loss wherever it is invested. One just cannot escape from "risk" completely; it is always there.

In making the trade, I'm assessing risks; the "4% return" is an expectation that my shares are eventually sold at $85 -- I get my $3.35 plus my initial capital back.

As it is looking right now, I'm going to get my $85 back on December 19 and will be pocketing the $3.35 from selling the call.

[competentone]

Originally Posted by trader220

I tend to think of the term "people" as a retail invetors sitting around, I generally dont refer to institutional business as "people"

But they are!

They may be insulated from certain emotions that the retail investor experiences -- since, for the institutional businesses, it isn't "their" money, but it is still "people" making the trades.

[trader220]

Originally Posted by competentone

I'm not really following you.

First "the trade" isn't over until the option contract expires, or my shares are taken @$85. If FCX drops and I keep my shares at expiration, "the trade" isn't over until I sell the shares at some point in the future.

I'm not sure what you mean by "your true risk is the 85 dollar price in the stock less the 3 and change you collect"? The $85 (actually $84.84) to buy the shares represents the capital that could have been invested and earning a return on something else. It is "at risk" in that it can drop in price -- maybe even all the way back to the $17 range we saw last December; maybe even to zero if some huge accounting scam was revealed at the company -- but I don't expect that to happen. The $85 ($8500 per contract) is at some risk of loss wherever it is invested. One just cannot escape from "risk" completely; it is always there.

In making the trade, I'm assessing risks; the "4% return" is an expectation that my shares are eventually sold at $85 -- I get my $3.35 plus my initial capital back.

As it is looking right now, I'm going to get my $85 back on December 19 and will be pocketing the $3.35 from selling the call.

The "risk free" rate is peanuts these days but its there. Whether or not you believe the stock can go down to 80 or 75 or 17 or 0 is not rellivant

[trader220]

Originally Posted by competentone

But they are!

They may be insulated from certain emotions that the retail investor experiences -- since, for the institutional businesses, it isn't "their" money, but it is still "people" making the trades.

The mind set, the information, the scale and their goals for each trade are vastly different.

[trader220]

Originally Posted by jyl

Kind of tangential (well, very tangential) but retail investors this year have been single-minded. The vast majority of fund flows have been into bond funds and out of money markets. Equity funds have gotten little, save a bit to emerging markets equity.

I am not a fixed income guy. Any thoughts on the bond markets?

I am not really a fixed imcome guy either so I dont have any real good insight for you sorry. Options on anything but fixed imcome is my background.

Call Bill Gross, he's the guy I trust the most on opinions in the bond market!!

[jyl]

Originally Posted by competentone

But they are!

They may be insulated from certain emotions that the retail investor experiences -- since, for the institutional businesses, it isn't "their" money, but it is still "people" making the trades.

As an institutional money manager, I can tell you this class of "people" (I hope we qualify) suffers from intense fear and avaricious greed just like retail investors. We have information, resource, and (sometimes) experience advantages over the retail investor, many of us also have the disadvantage of being measured over short time periods (right now, too much of the industry is focused on performance over the 21-something trading days from Nov 25 to Dec 31), and unlike the retail investor our careers are at stake. Many of us are also measured by relative performance, meaning are required to beat the benchmark and the competition. It is an interesting and challenging business, but not as carefree as "investing other people's money" might seem. Would that it were so. I'd sleep better.

[trader220]

On the institutional options side you dont have professionals sitting around doing covered calls. ALso, on the institutional options side from a pricing persepctive outlook on the stocks direction is meaningless. In addition accounting of the PnL on a single trade is for the most part never looked at on an individual basis, its part of a greater position.

[competentone]

Originally Posted by jyl

As an institutional money manager, I can tell you this class of "people" (I hope we qualify) suffers from intense fear and avaricious greed just like retail investors. We have information, resource, and (sometimes) experience advantages over the retail investor, many of us also have the disadvantage of being measured over short time periods (right now, too much of the industry is focused on performance over the 21-something trading days from Nov 25 to Dec 31), and unlike the retail investor our careers are at stake. Many of us are also measured by relative performance, meaning are required to beat the benchmark and the competition. It is an interesting and challenging business, but not as carefree as "investing other people's money" might seem. Would that it were so. I'd sleep better.

You may take your work more seriously than others in your profession do.

You'll have a hard time convincing me that the hundreds of billions lost (and now mostly taken over by the Federal Reserve or insured by the FDIC) that was being managed by the major investment banks (we all know their names) was being handled by people with an ounce of concern about losses. As long as they got their take, they didn't give a s**t about what happened with the money since it wasn't theirs if lost.

They may have had some concerns about being pushed off the "gravy train" if they had too significant losses, but now, with the new Fed's "no failures ever again" policy (at least for the politically connected firms), you can be sure that there is a whole lot of trading/investment taking place with virtually no concerns about losses.

The new institutional mantra seems to be: "Recklessness rules!"

[trader220]

Originally Posted by competentone

You may take your work more seriously than others in your profession do.

You'll have a hard time convincing me that the hundreds of billions lost (and now mostly taken over by the Federal Reserve or insured by the FDIC) that was being managed by the major investment banks (we all know their names) was being handled by people with an ounce of concern about losses. As long as they got their take, they didn't give a s**t about what happened with the money since it wasn't theirs if lost.

They may have had some concerns about being pushed off the "gravy train" if they had too significant losses, but now, with the new Fed's "no failures ever again" policy (at least for the politically connected firms), you can be sure that there is a whole lot of trading/investment taking place with virtually no concerns about losses.

The new institutional mantra seems to be: "Recklessness rules!"

That’s a pretty harsh opinion of an entire industry which you obviously don’t work in or have firsthand experience with.

The Federal Reserve takes over retail banks that lost money making shaky loans not investments in the market. The other companies which the Federal government has taken over i.e. GM or AIG are not retail banks.

You opinion is really baseless, off the mark, and nasty.

[competentone]

Originally Posted by trader220

That’s a pretty harsh opinion of an entire industry which you obviously don’t work in or have firsthand experience with.

The Federal Reserve takes over retail banks that lost money making shaky loans not investments in the market. The other companies which the Federal government has taken over i.e. GM or AIG are not retail banks.

You opinion is really baseless, off the mark, and nasty.

Umm...where have you been during the last 18 months?

Just because the investment "banks" have been allowed to convert themselves to retail banks -- and access the Fed window where they can exchange their junk investments for good "clean" Federal Reserve notes -- does not really make them the equivalent to commercial retail banks.

The major investment "banks" are all substantially involved in managing money, making investments in various markets -- they are not anything like the commercial banks the Fed. used to govern. They all have trading desks that run significant positions in the stock market -- their positions are large enough that they can pretty much move the market any direction they want -- at least in the shorter term.

Money is fungible; even if the investment banks cannot get margin directly from the Fed to buy positions in the stock markets (I'm not sure that's not the case), they can continue to trade positions because the losses on other investments (the mortgage backed crap) have been assumed or insured by the Fed. and FDIC.

The whole stock market should be structured completely differently right now, but instead, there are powerful institutions, represented by the investment banks, affecting the market. The major investment banks should not exist because they went bankrupt. They exist because the U.S. taxpayer is paying the cost of keeping them alive.

That's the harsh reality of the situation.

[Rich76_911s]

Well clearly this little discussion took a turn, but to get back to options I though that some of you less experienced option traders might like to look at a cool little tool that you can use to analyze option positions.

You can enter up to 4 option positions with your stock position and this tool will give you a profit and loss chart on your overall position or it will show you each componenets profit and loss.

http://www.optioneducation.net/investigator_2/wi_positionSimulator.asp?stratid=2&tfList=%5Bobject+Object%5D&invalidateFlag=false&%5F%5FlabelPlacement=right&%5F%5Ftoggle=false&enabled=true&%5FminHeight=0&%5FminWidth=0&%5F%5Fwidth=182&%5F%5Fheight=22&stylecache=%5Bobject+Object%5D&useHandCursor=false&rolloverIcon=falseUpIcon&childrenCreated=true&%5F%5Ff%5Fclick=%5Btype+Function%5D&initializing=false&upSkin=%5Flevel0%2EoDetailMov%2EoSD%5FanalysisButt on%2Efus&skinName=%5Flevel0%2EoDetailMov%2EoSD%5FanalysisBu tton%2Efrs&methodTable=&styleName=dgStyle&phase=rollover&rolloverSkin=%5Flevel0%2EoDetailMov%2EoSD%5Fanalys isButton%2Efrs&downSkin=%5Flevel0%2EoDetailMov%2EoSD%5FanalysisBu tton%2Efds&keyHandler=%5Bobject+Object%5D&sSimulatorURL=http%3A%2F%2Fwww%2Eoptioneducation%2 Enet%2Finvestigator%5F2%2Fwi%5FpositionSimulator%2 Easp%3Fstratid%3D2

[trader220]

Rich, give me a buzz again about the other thing you called about.

On the topic of this thread, I find it pointless to argue with people on the internet who can lob insults from behind their computer. Rich you were in the business and you know how things work too.
I am always happy to answer options questions for people but I have no desire to educate someone who has already made an opinion of the system and is 100% sure they’re right even though they’re not in the business.

[jyl]

Investment banking and asset management are different businesses.

The large majority of asset mgmt, especially managing client assets aka other people's money, is not done by investment banks, it is done by pension and mutual fund managers large (Fidelity, Vanguard, Capital, Pimco, T Rowe, etc) and small (me, etc), by endowment managers, and by hedge funds large and small.

Most every investment bank has an asset mgmt group, both for proprietary assets (the bank's own capital) and for third-party assets, but they are a small part of the overall industry and are run separately from the investment bankers and sellside analysts/traders.

If you look at the worst asset blowups over the past couple years, the MBS and CDO^2 stuff, most of that directly hit the banks' own balance sheets, not the portfolios being managed for clients. Unfortunately, the knock-on effect hurt everyone, because of the banks' role in providing credit for the economy.

(I misjudged this back about 2 years ago. I was a bear on RE and I expected MBS etc to blow up, but figured it would directly hit pension, mutual, and hedge funds. The total potential loss, while large, didn't appear unmanageable relative to the total size of bond investors' portfolios, which are for the most part not levered. I didn't think the banks would be stupid enough to actually own this stuff themselves, on their overly-levered balance sheets. I was wrong.)

Originally Posted by competentone

Umm...where have you been during the last 18 months?

Just because the investment "banks" have been allowed to convert themselves to retail banks -- and access the Fed window where they can exchange their junk investments for good "clean" Federal Reserve notes -- does not really make them the equivalent to commercial retail banks.

The major investment "banks" are all substantially involved in managing money, making investments in various markets -- they are not anything like the commercial banks the Fed. used to govern. They all have trading desks that run significant positions in the stock market -- their positions are large enough that they can pretty much move the market any direction they want -- at least in the shorter term.

Money is fungible; even if the investment banks cannot get margin directly from the Fed to buy positions in the stock markets (I'm not sure that's not the case), they can continue to trade positions because the losses on other investments (the mortgage backed crap) have been assumed or insured by the Fed. and FDIC.

The whole stock market should be structured completely differently right now, but instead, there are powerful institutions, represented by the investment banks, affecting the market. The major investment banks should not exist because they went bankrupt. They exist because the U.S. taxpayer is paying the cost of keeping them alive.

That's the harsh reality of the situation.

[competentone]

Originally Posted by trader220

On the topic of this thread, I find it pointless to argue with people on the internet who can lob insults from behind their computer. Rich you were in the business and you know how things work too.
I am always happy to answer options questions for people but I have no desire to educate someone who has already made an opinion of the system and is 100% sure they’re right even though they’re not in the business.

So you're saying that only those people who are "in the business" understand what went on with the $800 billion in TARP, or the trillion dollars in paper the Fed has taken on their books, or the additional few (dozen? does anyone really know the number?) trillion worth of paper the FDIC and Fed has offered insurance on?

As for my option position: I expect that Dubai, while small, represents an event that will drive certain international market participants to hard assets; I closed my short on the FCX calls (with a "nice" profit for just a few days holding the position -- thanks to the dollar "strength" in response to Dubai's "default") and am holding my FCX shares without writing/hedging with options at this point.

[trader220]

Originally Posted by competentone

So you're saying that only those people who are "in the business" understand what went on with the $800 billion in TARP, or the trillion dollars in paper the Fed has taken on their books, or the additional few (dozen? does anyone really know the number?) trillion worth of paper the FDIC and Fed has offered insurance on? .

Where did I say that?

My comments were about how you assume that every money manager has a careless attitude since its not their money. You speaking for all money managers is really what makes me laugh since you're not in that business.

[competentone]

Originally Posted by trader220

Where did I say that?

My comments were about how you assume that every money manager has a careless attitude since its not their money. You speaking for all money managers is really what makes me laugh since you're not in that business.

I concluded that your comments implied that I did not have knowledge about the financial world (and could not criticize it) because I was not "in the business."

I have never stated -- nor do I think my comments imply -- that "every money manager" has a careless attitude. I rarely use adjectives like "every" or "all" when discussing people since I am extremely focused on people as individuals -- I try not to categorize people in "groups."

That said, considering what has happened in the financial world over the past two years, a certain level of general "disrespect" toward those in the banking/financial industry would seem to be a rational response.

Three years ago, it would have been "unthinkable" that the Federal government would be bailing out the investment banks (when it first started happening, people were commenting how "unbelievable" it was). The investment banks controlled capital people chose to put at risk -- there was never any implied "government guarantees" with large portions of the money with the investment banks.

Additionally, on the retail side of the financial industry, I would have little trouble showing you an extreme number of examples of "investment advisers" selling people "crappy products" because they are more interested in the commissions they generate than in the financial health of their "clients." The industry, on the retail level, has a problem of not educating and not disclosing (details like actual commissions on products) to the public. There is too much "selling" and not enough "advising."

That doesn't mean there are not "good people" in the business; the good people recognize and are critical about the problems in their industry. What's your stance?