Hi Orwell:
Thanks for taking the time to provide your detailed response inPost #:
16200648. EXCELLENT summary IMO. This thread and your post got me researching a bit more.
And BTW that is a smashing spx analysis earlier today
For info I have quite a bit of experience in several of the options (pun intended) that you discussed. Just a few thoughts here on what I have learnt by way of sharing (those puns!!).
CFD’s; amazing product which I have used mainly for index trading over the last few years with very limited success. (I have also traded most common currency pairs, gold, silver using cfd’s and dabbled with binary trades; that’s for another time) Contrary to popular belief they are NOT dangerous WHEN IN THE RIGHT HANDS. With stops attached you can trade for very small amounts They are exceptionally “affordable” with very tight spreads. eg. If trading the XJO equivalent the Oz200 you can buy a position with a $1 spread; so if you think the market will fall you sell and for every point the market moves down you make $1 (ditto reverse) ….. HOW EASY IS THAT? The answer is NOT VERY!
Of course you just increase your position size to suit your appetite and multiply the gains/losses accordingly.
When you trade these babies you learn very quickly about counter trend moves and if you do not have a good handle on risk/reward you will find yourself quickly donating to your provider.
IMO trading them takes enormous time to master and in my experience lures you into ever smaller time frames. It is very aligned to gambling to be blunt.
I should announce I do not consider myself a trader (certainly not a day trader); never have aspired to such status and all my CFD stuff I put down to learning (about markets and how they “work”). Eg “its playing with the pennies so I learn how to invest my pounds” LOL
Warrants; Never used them as I understand they are a form of “back door borrowing” and if/when I to borrow to invest I will do that against real assets (property or shares) at a lower cost. Happy to be proved wrong though?
Buy /Writes; eg Buy the share and sell a call option. Been a player in this field however I believe it’s a “mugs game”. The promise is additional return on your shareholding however the reality is you have UNLIMITED DOWNSIDE (share going to $0) and you cap your upside. I have found even trying to adopt fancy “rolling up” strategies to be very expensive and the strategy a waste of time and effort .again Happy to be proved wrong though? It also flies in the face of the main reason to own shares; you want them to ROCKET upwards; if that happens you will be “called away”.
It seems that this thread discussion has helped me crystalise my basic aim which I define as:
Owning a share portfolio with the aim of capturing those nice bull up moves, ensuring the juicy FF dividends that are now on offer but protecting from the major corrections.
I previously posted about the magnitude of those UP and Down moves here
http://hotcopper.com.au/threads/the-big-boys.2493940/page-287?post_id=16027194#.Vigqeys5QcM
and here:
http://hotcopper.com.au/threads/the-big-boys.2493940/page-313?post_id=16079736#.Vigpyys5QcM
I have concluded the answer might be;
OPTIONS; buying an out of the money put option against shares that you own.
What follows is a series of thoughts and screen shots that I have done to just organise my thoughts and perhaps a reference for future thoughts; it may be of use to someone so I will share (and I always putting my ideas in the realm of public scrutiny is sobering!!)
The ASX talks about this strategy here:
http://www.asx.com.au/products/equity-options/protected-put-options-trading-strategy.htm
And using index options in a similar way here
http://www.asx.com.au/products/equity-options/eto-for-smsf.htm
So I did a cruise of the options pages on Commsec & here are some screen shots with thoughts on board from Friday using BHP as the study: (only chose bhp for the analysis randomly and mainly for the div; THIS NOT A RECO RE BHP)
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Also looked at the asx options section here:
http://www.asx.com.au/asx/markets/optionPrices.do
It gives info on all available options like this:
View attachment 107369
Which is easy to copy and paste into an excel spread sheet to start to manage the data like this:
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So here are 2 charts showing how $20 and $22 strike prices are priced over different Expiry dates; A few thoughts on the charts
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& this chart shows how price changes for a set expiry date and different strike prices;
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So I wrap all that together and I conclude a longer dated strike price entry is better; lets look at say buying 1,000 BHP at Fridays close when these options applied. Some thoughts on the chart below
View attachment 107374
So, based on these scenarios we get a “fair protection” for a reasonable probability tumble. I could scenario endlessly. Worth noting though that I just checked the 6 monthly BHP chart and its had 3 falls of greater than $7 in that time. If that were to occur then based on existing option valuations the Put would be worth approx. $3 eg $2 in the money and still representing a $5 loss. That’s disappointing.
CONCLUSION; I have found the returns that I have found in this analysis disappointing. It says to me that its very expensive to get even a partial hedge against falls in the market using options. I will continue to ponder this and certainly welcome anyones thoughts. (I wonder if anyone has actually taken the time to read what I have done! LOL) If not I always find jotting stuff down helpful as a guidepost of how I thinking.
A critique of what I have done would also be welcome if anyone could be bothered?? (which i doubt).
Cheers g
(20min delay)
