Self-directed Investing

[JoseCuervo]

That's what I liked about USAA, they gave me 90 free trades for signing up.

Nothing in life is free.

Free commissions are very expensive if they botch the executions on the trades, mess up a dividend payment, screw up a re-org, etc.

(I think all the houses have a teaser to get you in, but, at the end of the day, you need a house that has a back-office that is good. )

 

[Henning]

Since the 90's.. NOt always succesful at it either took a long time.. I don't get into a position I can't hedge. For example the CAT trade I just closed. It's a real company but the chart still tell me the market was moving down. I put on the trade with limited risk that is defined before I ever enter. If I am wrong I simply get out quick.

Dividend stocks are stocks I will keep forever. When they start falling down, I sell naked puts hoping to get exercised - and this allows me to "buy in " cheaper! If I am not exercised, I keep the premium and do it again until I am filled.

This is the added cost burden placed on society by commoditizing money. Every one of the transactions has a cost burden and produces nothing.

 

[EminiTrader]

Understood, but your actions in the stock market have nothing to do with actual values of market products. As a financial professional you are using psychological profiling of a group's fears under known conditions to determine market values. The fears are driven by nothing but imagination though, so there is nothing to stabilize this function. All it does is generate more money from nothing but imagination. We have too much of that already. Money is not supposed to be its own commodity for this very reason.

To a degree you are correct. But at the end of the day - remember - I do this for ONE REASON ONLY - to make money. Period. Be it an ETF like the trade yesterday or the dividend collars I put on that are actual companies - I do it to live, I do it for money.

Be it I am lucky, imagination - whatever.. it works - I profit from it and I'm happy. Is it for everybody? NO - it's not. Most can't manage their own portfolios.. but again, I live life on my terms (for the most part) and I truly believe ANYONE can do it. If I can, you can...

 

[Henning]

Nothing in life is free.

Free commissions are very expensive if they botch the executions on the trades, mess up a dividend payment, screw up a re-org, etc.

(I think all the houses have a teaser to get you in, but, at the end of the day, you need a house that has a back-office that is good. )

Yeah, understood, but I am not in the trading end of it, I am in the holding end, and have enough past with USAA to trust them to have a back office that can fulfill my requirements adequately.

 

[JoseCuervo]

To a degree you are correct. But at the end of the day - remember - I do this for ONE REASON ONLY - to make money. Period. Be it an ETF like the trade yesterday or the dividend collars I put on that are actual companies - I do it to live, I do it for money.

Be it I am lucky, imagination - whatever.. it works - I profit from it and I'm happy. Is it for everybody? NO - it's not. Most can't manage their own portfolios.. but again, I live life on my terms (for the most part) and I truly believe ANYONE can do it. If I can, you can...

There used to be a great book (The Money Masters??) that I read that discussed the best investors and traders in each market (equities, commodities, bonds, options, currencies, etc.) Fascinating read on who was successful, long term. I don't know if it has ever been updated.

If you can "at home" trade options profitably, each year, that is an impressive feat. And, like you said above, the money you spend on toys, food, and shoes is all money that you don't have for capital.

 

[EminiTrader]

There used to be a great book (The Money Masters??) that I read that discussed the best investors and traders in each market (equities, commodities, bonds, options, currencies, etc.) Fascinating read on who was successful, long term. I don't know if it has ever been updated.

If you can "at home" trade options profitably, each year, that is an impressive feat. And, like you said above, the money you spend on toys, food, and shoes is all money that you don't have for capital.

You just have to be disciplined and manage risk. If there is any info taken from any of my input - it is MANAGE RISK FIRST. Too many people are looking for gains and not worried about risk. Trust me - it doesn't work. At least not for me

I don't just trade options though. It's a big part of what I do but it goes just a bit deeper..

But to your point about the capital - that's huge... People think you have all this money because you have all this money in your trading account.. well I cant touch that money. I need it!

NOw I do trade with Portfolio Margin- which gives me preferential margin rates, but I have to maintain capital balances as well...

So whatever ANYONE does - whatever investments you make - ask yourself - is it hedged? What is my risk? and what can I do to lower my risk.. The profitable trades take care of themselves. It's the risk management that is most important - IMO..

 

[asechrest]

Understood.. I was simply responding to the OP's question

Which I appreciate! I mirrored your trade and put my life savings into it. Hope it works! I kid, I kid. Just wanted to see your thought process. I soak up every bit of knowledge that I can.

 

[EminiTrader]

Yeah, understood, but I am not in the trading end of it, I am in the holding end, and have enough past with USAA to trust them to have a back office that can fulfill my requirements adequately.

Now you make a great point. If you have a career or otherwise have money coming in- then what you do is buy and hold - dollar cost averaging DOES indeed work if done properly.

But if you "trade for a living" you have to churn and burn trades to live

 

[Henning]

To a degree you are correct. But at the end of the day - remember - I do this for ONE REASON ONLY - to make money. Period. Be it an ETF like the trade yesterday or the dividend collars I put on that are actual companies - I do it to live, I do it for money.

Be it I am lucky, imagination - whatever.. it works - I profit from it and I'm happy. Is it for everybody? NO - it's not. Most can't manage their own portfolios.. but again, I live life on my terms (for the most part) and I truly believe ANYONE can do it. If I can, you can...

Making money while producing nothing of value is stealing from society. Basically existing as a vampire.

 

[EminiTrader]

Which I appreciate! I mirrored your trade and put my life savings into it. Hope it works! I kid, I kid. Just wanted to see your thought process. I soak up every bit of knowledge that I can.

Well NEVER use more than 1 - 2 percent on any one trade!! NEVER put money in one trade... like I said - over HALF my trades LOSE!!

To be honest a great book I just read was Money Master The Game by Anthony Robbins. I know, I know,, some may laugh. The book does have alot of hype but the content is really good. It's worth the read..

 

[EminiTrader]

Making money while producing nothing of value is stealing from society. Basically existing as a vampire.

Well there IS value. I mean if you have any money managed by ANYONE I can about guarantee you, you own funds. be it ETF's or mutual funds. Those are all an average or a pool of stocks.

Take the DOW - they take 30 stocks and make an average. So YES they make markets out of THIN air - and HUGE hedgefunds and mutual funds trade them It is what it is.

In any event - what I do is legal Many money managers do it (trust me, I know one or two ) and it's fine. If anyone feels I am stealing - i guess report me to the feds

Simply responding to OP and sharing what I do. Nobody has to believe it

 

[asechrest]

Making money while producing nothing of value is stealing from society. Basically existing as a vampire.

That's a bit harsh. You have no idea what he produces outside of his vocation. As I've gotten older, I've moved away from that sort of extreme altruism and more toward the "if you can't beat 'em, join 'em" side. Within reason, of course.

 

[JoseCuervo]

You just have to be disciplined and manage risk. If there is any info taken from any of my input - it is MANAGE RISK FIRST. Too many people are looking for gains and not worried about risk. Trust me - it doesn't work. At least not for me

I don't just trade options though. It's a big part of what I do but it goes just a bit deeper..

But to your point about the capital - that's huge... People think you have all this money because you have all this money in your trading account.. well I cant touch that money. I need it!

NOw I do trade with Portfolio Margin- which gives me preferential margin rates, but I have to maintain capital balances as well...

So whatever ANYONE does - whatever investments you make - ask yourself - is it hedged? What is my risk? and what can I do to lower my risk.. The profitable trades take care of themselves. It's the risk management that is most important - IMO..

Somehow you have managed to eliminate / reduce / manage risk so that you can have returns above market?

That is pretty much contrary to everything ever studied in finance where the return is the reward for the amount of risk you assume.

If, after all the time of "churn and burn", you are making more than market returns AND "manage"ing risk, you should be a bazillionaire. People would be backing up trucks with cash for you to invest.

 

[PaulS]

Making money while producing nothing of value is stealing from society. Basically existing as a vampire.

Oh come on!!!! There are many who would argue that driving boats for rich people produces nothing of value and is stealing from society.

Progressive rubbish.

 

[JoseCuervo]

Well there IS value. I mean if you have any money managed by ANYONE I can about guarantee you, you own funds. be it ETF's or mutual funds. Those are all an average or a pool of stocks.

Take the DOW - they take 30 stocks and make an average. So YES they make markets out of THIN air - and HUGE hedgefunds and mutual funds trade them It is what it is.

In any event - what I do is legal Many money managers do it (trust me, I know one or two ) and it's fine. If anyone feels I am stealing - i guess report me to the feds

Simply responding to OP and sharing what I do. Nobody has to believe it

The "DOW" is just an index of 30 stocks, just a number with a math formula that was invented by a newspaper editor so people could ask "How'd the market do today?"

It is not "thin air". It is just math. Just like the Pythagorean Theorem.

Now, depending on what you are referring to, people have created ways to invest in the "DOW". One way is a mutual fund that buys the 30 stocks in the same weighting as the index. (all the same is true for the SP500).

Then, there are also futures contracts and options that truly are created out of "thin air" where two parties agree to take OPPOSITE sides of a contract and one party will make money, one party will lose money, by definition.


To circle back, are you able to beat the "market" year in and year out, including the transaction costs?

 

[JoseCuervo]

Oh come on!!!! There are many who would argue that driving boats for rich people produces nothing of value and is stealing from society.

Progressive rubbish.

The trading of options, as described above, does create liquidity in the markets, so there is some "creation" occurring. The value of that, to society is a different debate.

There have been many financial instruments created over the past 30 years that actually do not provide any value to "society", and, every so often we have to have the government step in to regulate what the "free market" gets carried away inventing.

 

[Henning]

Well there IS value. I mean if you have any money managed by ANYONE I can about guarantee you, you own funds. be it ETF's or mutual funds. Those are all an average or a pool of stocks.

Take the DOW - they take 30 stocks and make an average. So YES they make markets out of THIN air - and HUGE hedgefunds and mutual funds trade them It is what it is.

In any event - what I do is legal Many money managers do it (trust me, I know one or two ) and it's fine. If anyone feels I am stealing - i guess report me to the feds

Simply responding to OP and sharing what I do. Nobody has to believe it

All of this 'producing something from nothing' is untrue though, in the end it costs someone individual suffering, often times many people have to suffer the losses of speculative fools in the market. Our money has no value besides the caloric value when it burns.

The markets are still based in "Divine Right" of ownership, which is a lie that does not exist in nature. That is a big problem for humanity. Our money is created from thin air by a private entity backed by the full faith and credit of the US citizens. Every dollar you "make" is a tax, and addition to the national debt, on top of the market loss that is felt directly by the participants.

It wouldn't be bad if we didn't consider money the most important thing in existence. If we assigned it the value of 'tool of trade' as was meant rather than 'commodity' which was forbidden under penalty of death at the time money came into existence., we would be much better off.

I don't really care if you believe either, not holding anything against you personally, just giving you something to think on. Our actions in society have consequences that reach far beyond ourselves, and we are accountable for those consequences; it's worth giving more thought to one's actions than "will it make me money?"

 

[EminiTrader]

All of this 'producing something from nothing' is untrue though, in the end it costs someone individual suffering, often times many people have to suffer the losses of speculative fools in the market. Our money has no value besides the caloric value when it burns.

The markets are still based in "Divine Right" of ownership, which is a lie that does not exist in nature. That is a big problem for humanity. Our money is created from thin air by a private entity backed by the full faith and credit of the US citizens. Every dollar you "make" is a tax, and addition to the national debt, on top of the market loss that is felt directly by the participants.

It wouldn't be bad if we didn't consider money the most important thing in existence. If we assigned it the value of 'tool of trade' as was meant rather than 'commodity' which was forbidden under penalty of death at the time money came into existence., we would be much better off.

I don't really care if you believe either, not holding anything against you personally, just giving you something to think on. Our actions in society have consequences that reach far beyond ourselves, and we are accountable for those consequences; it's worth giving more thought to one's actions than "will it make me money?"

Henning

If you buy 1000 shares of a stock, say CAT at 82.45 and the next day you sell it for 83.45 you are up $1000 profit less commissions. Do you honestly belive that is stealing money?

True, the person who shorted the stock is down $1000 - but that a grown man's decision to place a short trade vs a grown man who makes a decision to make a long trade. It's a zero sum game.

I dont see how that hurts someone who is not vested in the market. Same with ETF's - if you buy 100 shares, SOMEBODY somewhere MUST sell it to you. Otherwise we would not have a market... But in any event - everyone is free to feel how they wish... Just giving my side of it.

Money is NOT the most important thing in existance. At least not to me. If it was I would trade ALL day - not 1/2 hour per day. My family is most important. It's my job as a father to give my kids a decent life. Whether I trade time for money, or money for money.

 

[EminiTrader]

The "DOW" is just an index of 30 stocks, just a number with a math formula that was invented by a newspaper editor so people could ask "How'd the market do today?"

It is not "thin air". It is just math. Just like the Pythagorean Theorem.

Now, depending on what you are referring to, people have created ways to invest in the "DOW". One way is a mutual fund that buys the 30 stocks in the same weighting as the index. (all the same is true for the SP500).

Then, there are also futures contracts and options that truly are created out of "thin air" where two parties agree to take OPPOSITE sides of a contract and one party will make money, one party will lose money, by definition.


To circle back, are you able to beat the "market" year in and year out, including the transaction costs?

I honestly don't use the term "beat the market". I make a decent 6 figure income out of doing this. I spend alot of time researching and analyzing. I think I do better for myself than putting my money in a fund, that's for sure.

I place trades that I like, that make sense to me. For example - I am up so far this year 4.5% on my options account.

Do I make money every year? NO. I don't. Not that easy. THis is how I do it...

I have about 1 years worth of expenses at "home". Every quarter I take out money if I've made enough.

So let's say I start with 250K on January 1st. At the end of the 1st quarter if I am above 250 - I withdrawl that amount above 250. Some of that will go into replenish my "home account" and some will go into other investments that I may be involved with.

I've absolutely had losing quarters! Take the trade i illustrated above. I have December options on this trade. If the market tanks all week I'll be at full profit and I'll be done.

But let's say the markets goes sideways past the quarter - well I wont have a realized gain ( I may have an unrealized gain but can't close out the positions) NOw the issue is I may have up o 20 - 30 trades going like this so it's always up and down. I manage my account on a portfolio-wide basis - not individual issues...

Back to your question - have I won money every year? No, I have not. I've had 3 great quarters and 1 blow out quarter. It happens.

But I've been successful at this for over 12 years (meaning I live off of the proceeds) and I have booked losses in at least 4 of those years. But the 8 years of profit far outweigh the losers.

I guess what I am saying is - my money doesnt roll year by year - it's a constant.. Kinda hard to explain in a forum.. but I think you get it

 

[JoseCuervo]

Henning

If you buy 1000 shares of a stock, say CAT at 82.45 and the next day you sell it for 83.45 you are up $1000 profit less commissions. Do you honestly belive that is stealing money?

True, the person who shorted the stock is down $1000 - but that a grown man's decision to place a short trade vs a grown man who makes a decision to make a long trade. It's a zero sum game.
.

Equities are not a zero-sum game. As equities are ownership in the company, it is possible for you to make money on the investment (profits, dividends, retained earings, etc) that have no impact on any other party. For you to go long in a stock (CAT) does not mean somebody went short. Equities are much different than options.

Likely, for you to go long in CAT meant somebody else went flat. Possibly, the company issued shares, but, more than likely, you were buying from somebody who sold the shares.

 

[EminiTrader]

Jose - here's another example. This is a live trade that I have on that is losing. I put this trade on awhile back with March 2015 expiration:

Short 166 Call 5.65
Long 166 PUT 6.85
Short 168 Call 4.53

Max loss is $773 per spread traded. Max gain, unlimited, theoretically. I am down $429.5 per spread traded as of this writing. I will close this out if the DOW closes above 18103 - if not I'll roll it to January options at some point in the next few weeks

Add those 2 trades together and I am up a bit. I have 11 positions open right now and I am up $1780 per spread traded - with 7 of these trades LOSING currently

 

[EminiTrader]

Equities are not a zero-sum game. As equities are ownership in the company, it is possible for you to make money on the investment (profits, dividends, retained earings, etc) that have no impact on any other party. For you to go long in a stock (CAT) does not mean somebody went short. Equities are much different than options.

Likely, for you to go long in CAT meant somebody else went flat. Possibly, the company issued shares, but, more than likely, you were buying from somebody who sold the shares.

Jose - I do realize that I was just trying make an easy understandable example. I was licensed for a number of years... I should have used "hypothetical".

But yes when you buy 1000 shares - you may get shares from any number of other accounts -some may be closing, covering, shorting etc etc

 

[JoseCuervo]

I honestly don't use the term "beat the market". I make a decent 6 figure income out of doing this. I spend alot of time researching and analyzing. I think I do better for myself than putting my money in a fund, that's for sure.

That is what is called "beating the market". If you aren't "beating the market", then you are spending a lot of time staring at a blinking screen for no benefit.

The only way to "beat the market", long term, is to take more risk than the market. There is a direct relationship between risk and reward in investing. If you are making a "decent 6 figure income" on anything smaller than a 7 figure portfolio, congrats. And, if you are, you need to be investing greater amounts and eventually own a yacht for Henning to drive you around.

 

[EminiTrader]

This is what we do when we have 100 foot ceilings in JAX

 

[EminiTrader]

That is what is called "beating the market". If you aren't "beating the market", then you are spending a lot of time staring at a blinking screen for no benefit.

The only way to "beat the market", long term, is to take more risk than the market. There is a direct relationship between risk and reward in investing. If you are making a "decent 6 figure income" on anything smaller than a 7 figure portfolio, congrats. And, if you are, you need to be investing greater amounts and eventually own a yacht for Henning to drive you around.

If I ever buy another boat I will absolutely call Henning first! Thanks on the congrats! I'm not here to gloat.. I do ok. I'm happy with it and leave it at that.... I've learned many years ago not to discuss it as too many people think you are full of ****. I get it. This is probably the first thread I've ever discussed what I do.. and more than likely the last... back to the hangar I go

 

[JoseCuervo]

Jose - here's another example. This is a live trade that I have on that is losing. I put this trade on awhile back with March 2015 expiration:

Short 166 Call 5.65
Long 166 PUT 6.85
Short 168 Call 4.53

Max loss is $773 per spread traded. Max gain, unlimited, theoretically. I am down $429.5 per spread traded as of this writing. I will close this out if the DOW closes above 18103 - if not I'll roll it to January options at some point in the next few weeks

Add those 2 trades together and I am up a bit. I have 11 positions open right now and I am up $1780 per spread traded - with 7 of these trades LOSING currently

You have much more than $773 of risk exposed.

You paid $6.85 and sold $10.18 ($5.65 + 4.53) resulting in a credit of $3.33.

If the price goes to $200, your long put expires worthless, and your two short calls become worth $32 and $34, resulting in a lost of $66 (x the multiplier)(x the number of contracts).

The short calls you have above mean somebody else has the RIGHT to buy from you at $166 and $168. As the underlying security increases in values, those short calls will cost you more to buy back.

And, the long put you have is the right to sell at $166, which, as the price goes above $166, that put is worthless (on expiration).

Honestly, that trade has HORRIBLE levels of risk for a small $3 credit.

If the price goes to $300, even worse, if the price goes to $400, even worser...etc... etc...

 

[Henning]

Henning

If you buy 1000 shares of a stock, say CAT at 82.45 and the next day you sell it for 83.45 you are up $1000 profit less commissions. Do you honestly belive that is stealing money?

True, the person who shorted the stock is down $1000 - but that a grown man's decision to place a short trade vs a grown man who makes a decision to make a long trade. It's a zero sum game.

I dont see how that hurts someone who is not vested in the market. Same with ETF's - if you buy 100 shares, SOMEBODY somewhere MUST sell it to you. Otherwise we would not have a market... But in any event - everyone is free to feel how they wish... Just giving my side of it.

Money is NOT the most important thing in existance. At least not to me. If it was I would trade ALL day - not 1/2 hour per day. My family is most important. It's my job as a father to give my kids a decent life. Whether I trade time for money, or money for money.

There is no such thing as a zero sum game in our system, everything requires something to make it happen. Whether there is a gain or loss, the financial industry exacts a cost.

Trading stock isn't in and of itself a negative factor, why someone trades a stock determines that. If the consideration for the trade is only 'make money', there is not enough consideration being paid to understand the broader consequences of the action, repercussions are left undetermined. That is why most of your trades are losers.

What determines the quality of the act is the benefit or loss it creates in consequentially to yourself. "What did the trade do to the company? What does that do to society?" should really be asked in any trade. In a good trade that is likely to pay for you, the answers to those questions will be a positive. You have a long trading record, look back through the histories with this though in mind and see how the theory stacks for you.

 

[EminiTrader]

You have much more than $773 of risk exposed.

You paid $6.85 and sold $10.18 ($5.65 + 4.53) resulting in a credit of $3.33.

If the price goes to $200, your long put expires worthless, and your two short calls become worth $32 and $34, resulting in a lost of $66 (x the multiplier)(x the number of contracts).

The short calls you have above mean somebody else has the RIGHT to buy from you at $166 and $168. As the underlying security increases in values, those short calls will cost you more to buy back.

And, the long put you have is the right to sell at $166, which, as the price goes above $166, that put is worthless (on expiration).

Honestly, that trade has HORRIBLE levels of risk for a small $3 credit.

If the price goes to $300, even worse, if the price goes to $400, even worser...etc... etc...

OOPS - I gave the wrong positions - Sorry!! - otherwise YES this WOULD be a horrible trade! My vision is starting to get worse
SHORT 166 CALL 565
LONG 166 PUT 685
LONG 168 CALL 453

So add it all up and max risk is $773

Thanks for pointing that out - ruining my reuptation

 

[EminiTrader]

So basically the vertical went off for 1.12 credit and then the expense of the put. Works out the same. Still a synthetic short with a call protection.

Again, my trades may not suit anyone here. And that's perfectly ok. I was simply responding to OP's request to learn more about my trading style which may or may not be for anyone.. Works good for me, it has for many years, and I'm leaving it at that..

I guess i'll refrain from posting my short XLE, long XLV have fun guys

 

[EminiTrader]

Here's a screenshot Jose in case I messed it up again

 

[EminiTrader]

Lastly here is the SPY trade from yesterday... I'll leave it at that... Sorry about the thread hijack - was never my intent

Off to feed the kids

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[JoseCuervo]

OOPS - I gave the wrong positions - Sorry!! - otherwise YES this WOULD be a horrible trade! My vision is starting to get worse
SHORT 166 CALL 565
LONG 166 PUT 685
LONG 168 CALL 453

So add it all up and max risk is $773

Thanks for pointing that out - ruining my reuptation

Ok..... let's see what this trade is.


SHORT 166 CALL . . . . . 5.65 . . . . . is a bearish position, giving some one else the right to buy at $166, and obligating you to sell at 166

LONG 166 PUT . . . . . 6.85 . . . . . is a bearish position, right to sell at 166

LONG 168 CALL . . . . . 4.53 . . . . . is a bullish position, right to buy at 168

"trades" like the above are really not a "thing", they are just two positions. You have a SPREAD on the Calls......... and then, for some reason, you also happen to own a Long Put that has nothing to do with the call spread.


If we break down the Call Spread, you are Long the 168's and short the 166's. When you entered this position, you paid $4.53 for the Long 168 and sold the short 166 for $5.65, resulting in a credit in your pocket for $1.12.


Now, 3 things can happen to the price of the underlying security. It can go UP. It can go DOWN. It can stay the SAME.

If the price goes down below $166, both Calls become worthless, upon expiration. And you keep the $1.12 for profit.

If the price is between $166 and $167.99, the short call has value, and the Long call you own becomes worthless. If the price is between $166 and $167.12, you will make a small profit of between $1.12 and $0.01. At prices between $167.13 and $1.68 you will lose between $0.01 and $0.32

If the price goes above $168, then the value of the short 166 and the long 168 will have value, with the short ones always being $2 more valuable. At a price above $168 you will lose $0.88.

To recap:

• $159.99 and below $1.12 profit
• $166.-167.12 is profit of $1.12 to $0 (the premium already in your pocket)
• $167.13 to $168.00 is loss of $0.01 to $0.87
• $168.01 and above is a $0.88 loss

The Call side of your trade has a maximum gain of $1.12 if the stocks go down. and a maximum loss of $0.88 if the price goes up. Now, if the risk/reward of risking $0.88 (plus the margin requirements, commissions, etc) to make an uncertain $1.12 is a good trade, that is up to each individual's risk tolerances.

__________

As for the Put that is tossed into the equation, it only a good trade if the price goes below $159.15 (the 166 strike price less the cost of 6.85 to buy it.) No idea if the Put is a good trade or not, but some other guy has $6.85 of your money in his pocket, and he is equally confident that you will lose money as you are that you will make money, hence, the Zero-sum.

 

[EminiTrader]

Ok..... let's see what this trade is.


SHORT 166 CALL . . . . . 5.65 . . . . . is a bearish position, giving some one else the right to buy at $166, and obligating you to sell at 166

LONG 166 PUT . . . . . 6.85 . . . . . is a bearish position, right to sell at 166

LONG 168 CALL . . . . . 4.53 . . . . . is a bullish position, right to buy at 168

"trades" like the above are really not a "thing", they are just two positions. You have a SPREAD on the Calls......... and then, for some reason, you also happen to own a Long Put that has nothing to do with the call spread.


If we break down the Call Spread, you are Long the 168's and short the 166's. When you entered this position, you paid $4.53 for the Long 168 and sold the short 166 for $5.65, resulting in a credit in your pocket for $1.12.


Now, 3 things can happen to the price of the underlying security. It can go UP. It can go DOWN. It can stay the SAME.

If the price goes down below $166, both Calls become worthless, upon expiration. And you keep the $1.12 for profit.

If the price is between $166 and $167.99, the short call has value, and the Long call you own becomes worthless. If the price is between $166 and $167.12, you will make a small profit of between $1.12 and $0.01. At prices between $167.13 and $1.68 you will lose between $0.01 and $0.32

If the price goes above $168, then the value of the short 166 and the long 168 will have value, with the short ones always being $2 more valuable. At a price above $168 you will lose $0.88.

To recap:

• $159.99 and below $1.12 profit
• $166.-167.12 is profit of $1.12 to $0 (the premium already in your pocket)
• $167.13 to $168.00 is loss of $0.01 to $0.87
• $168.01 and above is a $0.88 loss

The Call side of your trade has a maximum gain of $1.12 if the stocks go down. and a maximum loss of $0.88 if the price goes up. Now, if the risk/reward of risking $0.88 (plus the margin requirements, commissions, etc) to make an uncertain $1.12 is a good trade, that is up to each individual's risk tolerances.

__________

As for the Put that is tossed into the equation, it only a good trade if the price goes below $159.15 (the 166 strike price less the cost of 6.85 to buy it.) No idea if the Put is a good trade or not, but some other guy has $6.85 of your money in his pocket, and he is equally confident that you will lose money as you are that you will make money, hence, the Zero-sum.

BINGO -it IS a vertical with a long put. BUT it's known also as a synthetic short (Long Put/Short Call) with a long call as protection. The trade was put on as I am speculating the market is going to move down more than 5 %

If it goes up - at expiration i lose 700 bucks per.. if it moves down like I belive it will - i'll close it out at about 1500 per spread. And that sir is how I make about 60% of my revenue - trades just like this. the other 40 percent is stock ownership / dividends w/collars - or selling naked puts on stocks I want to own long term - and a LITTLE bit of day trading the ES (Emini S&P) - hence my name Emini Trader

 

[EminiTrader]

Here's a screenshot of my risk curve... again this trade really only works out well for me if the market MOVES significantly, and down... but I discussed this in my analysis above. And as I stated - I do not win on these all the time.

BUT when I win I win on average 1500 per. When I lose I lose about 700. SO my max loss IS More - but if it goes to a certain point I close it out... it works - believe it or not

[/url][/IMG]

 

[denverpilot]

By the way, a note for the OP... I know the thread is "self-directed", but there is some value in letting someone who does the trading day in and day out for a living do some of the driving... and then paying them something reasonable for doing so.

Especially if you have other stuff to do. You know, like life... and work... and going flying... and what-not.

Trading like a madman is fun for a while... but you can also put someone to work for ya...

I got a nice cheese, chocolate, and other goodies basket from my investing dude this year.

I know exactly what I paid him (and what percentage of the holdings it is), and exactly how much ABOVE that he made me, and I very well know he paid for that basket out of some of his proceeds.

Nice of him to send me a tiny bit of my money back via the basket. Ha.

He also buys dinner when we meet. Or breakfast.

He thinks it's funny that I usually want to meet for breakfast and I'll only order the $5 "grand slam" type thing at the local 50's diner... cheap is cheap... and I'm full when we're done...

The trick with managers is to know what you pay them, what they made you, and that it's in both of your favor... the bad ones will make just enough to pay themselves. The good ones will make both of you money, and your time invested is only a couple of hours a quarter to review things.

 

[JoseCuervo]

BINGO -it IS a vertical with a long put. BUT it's known also as a synthetic short (Long Put/Short Call) with a long call as protection. The trade was put on as I am speculating the market is going to move down more than 5 %

If it goes up - at expiration i lose 700 bucks per.. if it moves down like I belive it will - i'll close it out at about 1500 per spread. And that sir is how I make about 60% of my revenue - trades just like this. the other 40 percent is stock ownership / dividends w/collars - or selling naked puts on stocks I want to own long term - and a LITTLE bit of day trading the ES (Emini S&P) - hence my name Emini Trader

The " lose 700 bucks " is really the cost of buying the Put. ($6.85). for the most part.

All the Call spread stuff is just "noise" and generates commissions and a small return/loss of $0.88-1.12. But also ties up capital due to margin requirements.

good stuff.

 

[EminiTrader]

I used to just do the synthetic. Long call/short put... or long put/short call - but just like buying/shorting a stock you have no protection. So when you go long the call - you buy protection - and essentially turn it into a vertical.

Well that was fun I'm keeping a close eye on IBM and CAT. I've done this on CAT 3 times in the past 6 months - it's a freaking cash-cow...

 

[asechrest]

Frankly, this turned into a neat discussion. Agreed: good stuff, fun to read.

DenverPilot: Point taken. I work in a service-based industry so I know there is value letting "the expert" handle it. On the other hand, I truly enjoy diving into new things. So if I decide to self-direct, I'll make the time to research.

 

[EminiTrader]

Frankly, this turned into a neat discussion. Agreed: good stuff, fun to read.

DenverPilot: Point taken. I work in a service-based industry so I know there is value letting "the expert" handle it. On the other hand, I truly enjoy diving into new things. So if I decide to self-direct, I'll make the time to research.

The good stuff about this - is you could open up a "sim" account and trade with fake money. It's great exposure and you start to see things unfold. And I believe it's free to open up a sim account. Just remember- it takes alot of time. It took me many years of trying hard to get good at trading and losses ARE part of the game... in any event good luck and always around if you have questions.

 

[asechrest]

I used to just do the synthetic. Long call/short put... or long put/short call - but just like buying/shorting a stock you have no protection. So when you go long the call - you buy protection - and essentially turn it into a vertical.

Well that was fun I'm keeping a close eye on IBM and CAT. I've done this on CAT 3 times in the past 6 months - it's a freaking cash-cow...

So if I'm not totally confused, your long call is purchased in tandem with your two-option short position and protects against an upward move (against your expectation) in the underlying security. If the security moves in the direction you expect, you realize your expected (theoretically unlimited) gains and are out the premium cost of the long call. If it moves in the opposite direction, you suffer your capped max loss on the synthetic position but make some of it back with your long call.

I think.