The Big Boys, page-337

Gj, thanks. I really respect people taking the time to do analysis and research. It’s the only way to professionally approach to trading or investing and really adds value to this forum. I also found though writing stuff out and publishing an argument here and publicly is very good for your own understanding, it forces you to make an argument and I get a lot out of doing it, even if no-one replies. There’s too much here to absorb in one go. I’ll look through it further in time but some initial thoughts in reply.

- Borrowing using property is a good strategy and margin loans are another alterative. But your initial query was about hedging for which you need to go short. Warrants are in fact borrowing, but they allow you to go short whereas lending on Property and Margin loans don’t, so they have their place. They have other flaws though so I’m not promoting them, just that they give a shorting opportunity when there are limited facilities available to do so.

- Re CFD’s, a provider once told me they have client turnover above 90% as does all their competitors. That is, more than 90% of people who open a CFD account don’t last.

- Both CFD’s and mini Warrants suffer from the questions around stops, where you place them and how you use them, which is a topic for a whole other essay. I no longer use stops at all, which is heresy to the way most traders are trained.

You’re on the right track with Options.

- I wouldn’t discard Writing calls against you portfolio as an income strategy straight away. There’s a bit to this, but I know of someone who’s made a bundle this way. Just need to refine how and when to do it and under what market conditions.

- Out of the money Puts are the obvious answer, but when you try and execute this with real pricing, it becomes a very marginal strategy. Which is what I think you seem to have found.

One of the answers here is not so much that Options strategies don’t work well, whether puts or calls. It’s just that in my view we live in a small, provincial local market in the ASX with poor liquidity, wide spreads and crap derivatives available compared to overseas. The ASX have improved option liquidity hugely in the last 5 years, partly by only quoting Option series if at least two market makers deal in a particular option. But this has reduced shares covered to about 75 only, and even then a lot of those will still have limited liquidity and hence poor spreads and pricing once you go out of the money or more than say three months out in time.

I suspect the answer is:

• Deal in Index options, specifically the XJO to get better liquidity and hence pricing. I haven’t tested it though but that might be your next exercise. You need a large diverse portfolio though if using it to hedge, although maybe the market hedge provided is attractive anyway.

• Set up a US account and invest in US share markets and US derivatives for much better pricing. This is where I’m heading for my directional option trades, although procrastinating a bit in setting it all up.

Hope that helps. I’ll go through your analysis in time, but options are a whole field of study that I’m still learning how to best utilise. You might also check out www.tastytrade.com to get some ideas for options, although their core strategies only really work on the US market because of better pricing. Good to learn from though.