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I think you give them too much credit. :-) IMO, journalism should be re-classified from a profession to a paid hobby.
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I agree with Frank. Filtering out talking heads who insist on trying to distill the daily financial activity of our entire planet down to one, or rarely two, "causes" is possibly my least favorite part of the whole game. I'm not sure what's sadder though: that so much mis-information is spread each day, or that the heads actually believe their own hype and feel like they're somehow doing the world a service?
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The penny trader would probably have the shortest investment horizon (highest turn-over rate) since she's trading more volatile securities. Studies have shown there is a very strong tendency toward chaotic movements (totally unpredictable IOW) on short timescales, so the odds are against a daytrading strategy. Plus she'll be exhausted from all her trading, while the other players should have lots of time to relax. So I'd put my money on her going first. The risks facing the other players are an order of magnitude less. Market movement during the 8 weeks will lie somewhere on a spectrum from one single, strong up or down trend to overall-flat with lots of "noise". In the extreme trend scenario, the odds are 50/50 for Old Timer and Passive John...since they are long only it will depend solely on whether the trend is up or down. Author will do slightly better since he has a small premium buffer. Retail Gal will win in this scenario if she picks the right direction and plays with high delta/gamma. At the other end of the spectrum - noisy and non-directional - the spread traders will have the advantage, and I think it will come down to either Birdman or Sedaka depending on which way IV moves during the 8 weeks. If the market is a mix of trends and non-directionality as it usually is, the spread traders should still have a statistical advantage over the long or short only traders, IF they build their spreads with enough wiggle room and exit before gamma gets too crazy.
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Mark, I understand your concerns. If it makes you feel better, this blog has been a world of help to me personally. April/May was my first month trading an IC, and I can already pick out several "mistakes" I would have made if I hadn't read your articles. Using pre-insurance was a key reason that I expect to end up with a (meager) profit. The April rally would have stopped me out long ago without those extra calls I bought. Also, learning to stay in my comfort zone, to re-evaluate the trade each day, and most importantly to let those last few nickels go have all been very helpful concepts for my first trade. In short, I may never be a billionaire trading options, but after following your blog I feel pretty confident I'm not going to lose my shirt either. So thanks!
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Oh...you're right, I didn't read it carefully enough. When I saw 20 points, I had a moment of panic that I may have missed something fundamental about IWM. I'm just second-guessing my decisions too much with the current rally... Thanks for answering an obvious question though.
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Mark, Could you help me understand why IWM strike prices are equivalent to 20 points apart? I've been using them as 'pre-insurance' in combination with RUT iron condors. Putting on 1 long IWM strangle for every 1 RUT IC, which saves me some $ on commissions compared to buying 10 IWM condors. But I'm concerned that I am missing something important, since I was under the impression that IWM was ~ 1/10 of RUT. Thanks!
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"There is no right answer, unless you think it's fair to look back afterward and then decide what you 'should' have done. There's nothing to be gained by doing that." This is a great statement and it highlights one of the biggest fallacies in any decision-making process, but especially investments. We can become obsessed with second guessing our choices and asking how the outcome would be different if we had picked Door #1 instead of Door #3. It's perfectly natural to wish that things had turned out differently and identify mistakes, but we can't undo what's in the past. Everything is in motion and we can only go one way with our trades - forward. IMO, the best way to fix a mistake is to learn from it, cut your losses at the appropriate point to conserve capital and move on down the road.
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I agree, your "product" is a much better idea. Mine was really just the simplest example I could think of, for the benefit of anyone reading this who may not be familiar with structured products. Your other points are good too, the elderly are stuck with whatever they have managed to accumulate up until now. Improper asset allocation among middle age and elderly investors seems to be a major reason why so many people are in trouble now, and unfortunately many of those are tempted to once again ignore their age and "get even" now that the bottom seems closer...
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This is a problem that bugs me a lot too. I think it comes down to what you and Income Trader both touched on...most advisors are salesmen. Nothing wrong with that necessarily, but you're both right that many do not have the training to put together an investment strategy more complex than placing clients into box 'A' for Aggressive, 'B' for Balanced, or 'C' for Conservative. The issue there, as you said, is that all three boxes rely on a mix of long equity and bonds exclusively. For the 'A' and perhaps a few of the 'B' clients, those vehicles may have a risk:reward profile they are comfortable with. Certainly not 'C' investors...and I think many more people would retro-actively place themselves in that category after seeing the effects of '08. What about structured products as an alternative? Take the most basic example, where you invest $95K in $0.95 zero coupon bonds and buy index calls with the remaining $5K. At the end of the period, the investor is guaranteed to walk away with their initial investment, plus a chance to capture a portion of any market rally. Obviously those rates don't exist currently, but there are other possible structures with limited risk. That type of package is something that the average planner should be able to wrap his head around, explain the benefits to his client, and still perform essentially a sales job. The point is, I see better possible results by giving sales people a packaged, pre-hedged product they can easily sell, rather than asking them to build those products themselves...something they may not be interested in or very good at. However, I also agree that many individuals would benefit from using basic strategies like collars if they would take the time to learn options basics.
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BTW, can you recommend any index option over the others for someone like me with a small account? Naturally, I'd like good liquidity and tight spreads, but it's hard for me to buy more than a few RUT contracts without going over my max allocation per trade. I feel like I need to trade one of the minis (DJX, XSP, etc) to give myself enough flexibility to scale positions or buy additional insurance. Is one better than the others?
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Nice series Mark, and I'm sure I speak for other rookies when I say that the graphs are very helpful!
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Great points Mark, I'm in this exact position right now. I won't be quitting my day job to trade options anytime soon, but I know there are real things I can do right now to move toward that goal. I think one of the worst "prerequisites" I hear from other traders is that you MUST have $_______ in your account to even begin trading. How ridiculous! As you mentioned, there are some excellent papertrading programs out there, and once I have a comfort level with a few strategies what's to stop me from making small trades with real money? Absolutely nothing. Obviously I can't quit my day job and live on that income now, but so what? For now I'm planning my options (paper) trades after work and executing them during my lunch break if my initial conditions are still met. That's not going to make me a multi-millionare overnight, but it's a step in the direction I want to go. Once I get to the point of trading with small amounts for supplemental income I'll be thrilled. In my opinion that IS a solid start to eventually trading full time. I also enjoy expanding my general knowledge base about all different types of strategies, but I try to eliminate those that don't seem to fit my risk/reward profile and move on. I've settled on some of the same strategies you use (condors and some calendars or double diagonals) as well as using verticals in a pairs trading strategy. That's really enough for me...if I can focus my time and hone my skills with that small sub-set of the options universe I'll be making real money eventually.
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Mark, as I understand it (Income Trader, please correct me if I'm not explaining this well), level 3 assets would encompass mortgage and asset-backed securities and things like CDS contracts that are based on the underlying MBS/ABS securities. Since these are loan receivables and depend on various factors like interest rate adjustments, prepayments and defaults over many years, the theoretical present value of the assets are not always the same as the market price of the corresponding securities or derivatives. I guess in a perfect market, buyers would fully evaluate loan characteristics and the fair market value based on bids would be close to the model value, but when buyers are in short supply and fear takes over, the market price takes a nose dive. That's my understanding of it, and it's not an easy problem to solve. I think most people would agree that these assets should be marked to market somehow, but that this is not a very objective method. If you're interested in learning more, search for "FASB 157", from whence these MTM rules come.
Toggle Commented Mar 9, 2009 on Mark To The Market at Options for Rookies
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Sure, sue your broker for making "bad" investments after the fact...and while you're at the lawyers office, throw in a lawsuit against the lender that "tricked" you into mortgage payments you could never hope to afford. Sad is the only word for it. I'm sorry but if someone isn't willing to put in the bare minimum of time to learn about the potential risks and rewards of their investments (including home mortgage, credit cards, etc) and to really OWN the potential risks the same way they would expect to OWN the rewards, then they should be barred from the court room. After working at a mortgage lender several years ago it became obvious that the cases of genuine fraud and trickery on the lender's part were relatively rare. Far more common were the cases of what I called "lender-assisted financial suicide". It's surpisingly easy to trick someone who's asking you to hurry up and trick them so they can move into their new McMansion. Just my frustrated 0.02
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In my opinion there has been a lack of responsibility on both sides of the advisor/advisee relationship, and it's been building steadily since the end of the dotcom wipeout. I don't think most advisors receive the type of training to understand or utilize options, in fact I think their education is geared almost exclusively to asset allocation in a rising market environment, as you said. And their investment vehicles are restricted to common stock, mutual funds, or bonds. That shows pretty clearly over the past year and in your example. On the other hand, clients should share the blame as they felt entitled to something that is never a given. Americans seem to think that it's their God given right to make 8-10% a year, or feel like the advisor got paid so their investments should automatically make money. Unfortunately, the average person may come out of this mess with the impression that if their broker got it wrong then the game must be far too hard for any ordinary citizens to play by themselves...instead of realizing that their broker was reading from a flawed script the whole time and is really not any smarter than the client.
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That's pathetic and very short-sighted. I'm pretty young so you tell me, has it always been like this in finance?
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I saw that post, and unfortunately I don't think the OP saw how you were trying to help him/her. Actually I've seen several threads on that board where you've tried to steer people away from the cliff and the usual response seems to be anger. They accuse you of being jealous for not seeing the genious of their strategies...pretty sad. But I guess some people just need to learn those things the hard way. http://www.despair.com/mis24x30prin.html
Toggle Commented Feb 27, 2009 on An Unnecessary Warning at Options for Rookies
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Thanks, I look forward to reading it.
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Mark, Excellent blog! I've been following your comments at EliteTrader for a while, and you seem like a knowledgable guy with some valuable experience...but more importantly like someone who has their priorities straight. This post is a great example of that underlying philosophy of sanity that I try hard to incorporate into my own trading. These rules are common sense, but unfortunately not common practice for many (short-lived) traders. Anyway, I've learned a lot so far from your articles, about options and risk management, and I just wanted to say thanks for sharing. Marty PS - I'm interested in picking up one of your books. Which would you recommend for someone with a pretty decent understanding of the basics who's looking to learn some advanced sell-side methods, including the "insurance" measures you often refer to?
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