comment on the strategy

O

osho67

A friend of mine follows the following strategy . I would much appreciate comments on this strategy. If something is not clear ,I could always ask his clarification on that point.


Our strategy takes into account directional trading, core fundamentals, dividend payments, less volatility and defensive stocks. We do not deal in index. At any given time we have 50% of intended investment in the shares in our portfolio that offer option.



In the current situation we feel that market has almost reached the bottom and would have slow but sure recovery. Under the circumstances we shall take the following position.

---------------------------------------------------


Say you want to invest for 10 contracts i.e. 10,000 shares.



You buy 5,000 shares.
Sell 5,000 i.e. 5 Contracts Call at a price at market for a month
Sell 5 Contracts Put at a price one below market say for three months
Buy 10 Contracts Put at the spread you decide for 2 Months.
Buy 5 Contracts Call at three to six moths away at the spread you decide.
Positions of strike prices are changed in the event of increased volatility and upward or downward movement of the related shares.
We are not concerned on how much commission we pay but focus only on bottom line.
Gearing is done of 30% to 50% of our investment if required. But facilities are in place.


We shall welcome your opinion or suggestion.


Thanks for any feedback
 
Quote from TrailingStop3:

Hi osho67,

just one quick question for my understanding: Is one contract for 1000 shares? I thought it is only for 100?

Daniel [/QUOTe


The friend is in Australia and there one contract is 1000 shares
More...
 
It's not really clear what your stategy is. It sounds like you're buying 5,000 shares, buying 5 protective puts at a lower strike (1 Aussie put = 1000 shrs), buying 5 bullish diagonal call spreads above the position and selling 5 reverse diagonal put spreads below your long position.

If I have that right, it's a weird position and it makes no sense to be adding layer upon layer of options which only mute the linear performance of the underlying while adding lots of add'l commissions and B/A slippage which will further degrade the results. There's no edge gained by adding all of those option legs. And your reverse diagonal put spread actually detracts from the performance because the time decay on the near month leg exceeds that of the far month.

And lastly, if my interpretation of your position is correct, you could save a leg by substituting 5 short puts for the underlying and 5 short calls "at a price at market for a month."
 
Quote from spindr0:

It's not really clear what your stategy is. It sounds like you're buying 5,000 shares, buying 5 protective puts at a lower strike (1 Aussie put = 1000 shrs), buying 5 bullish diagonal call spreads above the position and selling 5 reverse diagonal put spreads below your long position.

If I have that right, it's a weird position and it makes no sense to be adding layer upon layer of options which only mute the linear performance of the underlying while adding lots of add'l commissions and B/A slippage which will further degrade the results. There's no edge gained by adding all of those option legs. And your reverse diagonal put spread actually detracts from the performance because the time decay on the near month leg exceeds that of the far month.

And lastly, if my interpretation of your position is correct, you could save a leg by substituting 5 short puts for the underlying and 5 short calls "at a price at market for a month."
More...


Thanks for your comments. I will send this reply to my friend in Australia and find his comments. Commission he does not mind -probably has special arrangements with the broker. As I understand he is a big player in his market. Thanks again
 
This is all very nice but there is no mention as to the prices (ie implied volatilities) of the options bought and sold.

This is like saying "Okay here's my strategy. I close my eyes and blindly buy 5 shares of XYZ and sell 5 shares of ABC. Then I buy 10 shares of DEF and sell 10 shares of QRS. I pay no attention to their price or their historical spread. What do you think?"

What's important is not so much which strike and month you buy and which strike and month you sell. Much more important is the prices at which you do them.

Every business is based on value - evaluating merchandise and buying cheap and selling expensive. That's how professional diamond traders make a living. That's how professional fish traders make a living.

Why is it that people imagine that option trading is so different? That its a matter of what you buy and sell, rather than the prices you buy and sell at?
 
Quote from osho67:

A friend of mine follows the following strategy . I would much appreciate comments on this strategy. If something is not clear ,I could always ask his clarification on that point.


Our strategy takes into account directional trading, core fundamentals, dividend payments, less volatility and defensive stocks. We do not deal in index. At any given time we have 50% of intended investment in the shares in our portfolio that offer option.


In the current situation we feel that market has almost reached the bottom and would have slow but sure recovery. Under the circumstances we shall take the following position.

---------------------------------------------------

Say you want to invest for 10 contracts i.e. 10,000 shares.


You buy 5,000 shares.
Sell 5,000 i.e. 5 Contracts Call at a price at market for a month ........................................................................................

Positions of strike prices are changed in the event of increased volatility and upward or downward movement of the related shares.
We are not concerned on how much commission we pay but focus only on bottom line.


We shall welcome your opinion or suggestion.


Thanks for any feedback
More...
==============
Good clarification,Osh7 i mistakenly thought you were buying 5,000 shares;
selling 5,000 put contracts ...... .If those are 10 or 12 month contracts, maybe too bullish:p

Also you said ''almost the bottom , directional trading,core fundamentals,less volitility..............,slow but sure recovery''

Really??;''sure recovery''???Maybe for some sectors

Part of what you are doing is like insurance company math;
dont want to wisely comment on that,right now.

a] Dont really know Australian economy, but what if America and Australia has a big drought/big flood [like 2007, grains spike AGAIN,
:cool: You think MC Donalds is a defensive stock always????[i do not,nice rally now,ok]Maybe correctly, you assume war on terror /Iran is smooth sailing[less vol???] Maybe ,maybe not.

z] Dont really know Australian economy, but what if GM [general motors] keeps getting gov loans, & then US gov gives ,free,177 million new GM cars to Americans.OK, what then???

Actually you are such a precise writer, i wont disagree with ''almost bottom'' What if it is not the bottom,???Fertiziler stocks went down 50%, then rally, then 80%down -then nice rally...., then down more than 80%................................
 
Quote from dmo:Every business is based on value - evaluating merchandise and buying cheap and selling expensive.
More...

...or selling high and then buying back low :-D
 
What's important is not so much which strike and month you buy and which strike and month you sell. Much more important is the prices at which you do them.

Every business is based on value - evaluating merchandise and buying cheap and selling expensive. That's how professional diamond traders make a living. That's how professional fish traders make a living.
More...
Exactly. Where's the edge? I see none.
 
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