Options Quiz

hajimow · Dec 1, 2005

Your trade is the dullest trade I could image

So where is the action? 2% in two years? OK don't do risky trades as I or some traders do but come on get into some actions. You can invest in mutual funds (like balanced ones) that did not have a negative year in 10 years and and they had 15% in some years and invest in them. After 2 years your $4000 will be your one month toll fee driving in NY or CA highways:eek:

Bitstream · Dec 1, 2005

Here in London you can buy a bond issued by banks which is based on the underlying movement of the FTSE and has a year to maturity: you are guaranteed 70% return on any gains at year end and if the index falls you lose nothing.

This a much more attractive proposition and I bet something similar is on offer in the USA.

Maverick74 · Dec 1, 2005

Quote from Bitstream:

Here in London you can buy a bond issued by banks which is based on the underlying movement of the FTSE and has a year to maturity: you are guaranteed 70% return on any gains at year end and if the index falls you lose nothing.

This a much more attractive proposition and I bet something similar is on offer in the USA.

Actually we have those over here too. The 70% part kind of sucks because you are giving up a lot of yield. Now while you may say it's good because you have no downside risk, you can actually create these things on your own and keep 100% of the upside.

The idea is to buy a treasury note and use the discount to buy long term leap call options. If the Leap expires worthless, your interest on the treasury pays for the call. If the market rallies, you get 100% of the upside plus the leverage of the Leap. In other words, you will outperform the index substantially on any rallies.

Where as you will be underperforming the index by a substantial margin. These are actually sucker deals sold to the public and are very fee intensive. To the laymen, they sound so good but they produce awesome margins for brokers. Total cash cows.

Boulder · Dec 1, 2005

Quote from hajimow:

Your trade is the dullest trade I could image So where is the action? 2% in two years? OK don't do risky trades as I or some traders do but come on get into some actions....After 2 years your $4000 will be your one month toll fee driving in NY or CA highways:eek:

"Dull? Where is the action?"

Are you trying to make money or seek excitement?

I've parachuted out of an airplane and also been a floor trader in Chicago. If you want action jump out of an airplane.

If you want to make money and KEEP it, don't be afraid to examine low risk trades like the one described in this subject.

When I was on the floor, the guys who made money and survived year after year were conservative (spreading, scalping, etc). The speculators, looking for action, didn't last long.

I like the trade described in this post. Remember when the NASDAQ plunged 75%?

Boulder · Dec 1, 2005

Quote from Maverick74:

The idea is to buy a treasury note and use the discount to buy long term leap call options. If the Leap expires worthless, your interest on the treasury pays for the call. If the market rallies, you get 100% of the upside plus the leverage of the Leap. In other words, you will outperform the index substantially on any rallies.

Sounds exactly like what was described in the first post of this thread, except substituting a put for a call.

Maverick74 · Dec 1, 2005

Quote from Boulder:

Sounds exactly like what was described in the first post of this thread, except substituting a put for a call.

Yes, I'm not advocating the trade. I was simply suggesting that its better to do it yourself and get 100% of the upside rather then have the same instrument through a broker and pay enormous fees and give up 30% of the return.

Boulder · Dec 1, 2005

Quote from Maverick74:

Yes, I'm not advocating the trade. I was simply suggesting that its better to do it yourself and get 100% of the upside rather then have the same instrument through a broker and pay enormous fees and give up 30% of the return.

Understood and agreed. For someone who's looking to grow and protect his capital, I think this would be very attractive.

Is there something about the concept (using either puts or calls) that you dislike?

Maverick74 · Dec 1, 2005

Quote from Boulder:

Understood and agreed. For someone who's looking to grow and protect his capital, I think this would be very attractive.

Is there something about the concept (using either puts or calls) that you dislike?

No, it's not a bad trade per se. My original post was simply to inform that it was not risk free. I think it makes more sense to do the call side over the long term and use it as a proxy to invest with little risk. Definately don't do this through a broker.

Boulder · Dec 1, 2005

Quote from Maverick74:

I'll give you a great strategy. Buy zero coupon bonds with your base capital and take the discount and put them into one year call leap options on your favorite index. You have zero downside!!!!!!! And if the market has a strong year like it did last year you will reap the awards of the upside. This strategy will produce anywhere from flat to maybe up 15% to 20% returns in a reallly good year. My best guess on avg dull years is probably closer to 3% to 5%. But you have no risk! And if the bull runs, you run with it! Then just roll your leaps every year.

I did a search on this topic on Elite Trader and the ONLY post on it was by you in 2004. I respect and value your insight.

Maverick74 · Dec 1, 2005

Quote from Boulder:

I did a search on this topic on Elite Trader and the ONLY post on it was by you in 2004. I respect and value your insight.

Yeah, I remember that post. But I should correct that and point out there is small inflation risk. Not a really big deal. When I said no risk, I meant on the spread. But like I mentioned earlier in this thread, you could be getting paid interest in dollars that are worth less then when you started. I still think anyone can put this together on their own and it's not a bad way to participate in the upside of the mkt.