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  1. Post-meltdown investing advice?

    Almost... I was referring to the probability that an option ends up in-the-money by expiry. (It never pays to exercise a call option early, and only in unusual circumstances does it pay to exercise a put early; meaning, you're leaving money on the table if you exercise early.) At any given instant, if an option is out-of-the-money, there is a less than 50% chance that the market will move sufficiently by expiry to make it in the money and hence exercisable (at least for short-term options; LEAPS are a different matter). If you're familiar with the concept of 'delta' with respect to options, the delta of an option can be taken as an approximate proxy for the probability that that option will be in-the-money at expiry. Since most options trading takes place in out-of-the-money options, outstanding options expire worthless most of the time. But there's no free lunch shorting out-of-the-money options -- yes, they'll expire worthless and you'll make money more often than not, but the times that they don't, your loss is typically much bigger. So you have frequent small gains, and a few large losses, averaging out to zero if the options are fairly priced (i.e. accurately reflecting the volatility of the underlying stock).
  2. Post-meltdown investing advice?

    By the mathematics of statistical distributions and option-pricing, an at-the-money option has a roughly 50% chance of being exercised, an out-of-the money option, less than 50% (i.e. there is a less than 50% chance the market moves sufficiently to make the option exercisable). And the deeper out-of-the-money, the less likely to be exercised.
  3. Coming to a Business Near You

    Do you know for a fact whether the clearinghouse proposal calls for explicit government insurance of the clearinghouse? Do you know that the the government in its role of bank deposit insurer is effectively already on the hook if the CDS market blows up and takes down a major bank like JP Morgan, one of the largest holders of derivatives?
  4. Coming to a Business Near You

    I don't think you understand what's going on here. The big problem with credit derivatives is that they are done over the counter, and they are not netted out. If I buy one from A and then sell an equivalent contract to B, the contract doesn't just get transferred to B; instead I now have two outstanding (albeit mutually offsetting) contracts. They are mutually offsetting in terms of market risk, so I have no market risk. But I still retain counterparty risk -- if A goes bankrupt and cannot pay me, I still owe B. The problem is that there is something like $30T-$60T of gross contracts outstanding, however the vast bulk of these are mutually offsetting. The actual net exposure among parties is more like a couple of trillion dollars at the most. The point of a clearing-house is to have a central location that nets out mutually offsetting contracts and cancels them, in order to minimize the counterparty risk. In order to guarantee that the clearinghouse functions without interruption, the institutions that trade through it stand willing to financially back it in case a member gets into trouble. This is precisely how the futures exchanges have worked, and worked phenomenally well, for over a hundred years,
  5. Post-meltdown investing advice?

    Correct -- selling a naked put at strike 'X' has the mathematically identical payoff to buying the stock and selling a call at strike 'X'. The reason the calls trader higher than the puts at the same strike is the embedded interest cost in calls. If you take a position of: long stock, long put, short call (where put and call are the same strike and maturity) -- this position is perfectly risk-free and has to earn the risk-free interest rate. The way that it earns the risk-free rate is that the call is priced higher than the put by that amount. When you write the put, you don't have to put up any capital (just t-bills for margin), so the capital you would have used to buy the stock in the buy/write case can be invested in t-bills, so you make the put premium plus the risk-free rate on the capital that would have gone to buy the stock. That's how it all equals out such that both cases have identical payoffs. If you're daytrading the options, rather than holding to expiry, then I agree the concern I expressed doesn't hold.
  6. Post-meltdown investing advice?

    Betsy, a caution: contrary to popular belief, writing a naked put and doing a covered call are mathematically identical in terms of their payoff profiles, when done at the same strike. You can verify this in any option textbook, e.g. John Hull's "Options, Futures, & other Derivatives". It follows from what's known as the "put-call parity theorem". I've never understood why people thought covered calls were low risk while naked puts are high-risk -- or why one is approved for IRA's and the other is not. While it's true you'll tend to do very well with covered calls in a lower volatility environment where the market is gradually rising over longer periods of time (e.g. 2004-2007), you'll get hammered in a high volatility non-trending whipsaw type market -- which may be where we're headed. In this latter type of market, one month you'll buy the stock low, and then it rises sharply and gets called away -- and then the next month you'll buy high, and then watch it plummet, with the expired call only making up a portion of the loss. Then for the next month you'll write a call option at the lower strike, and the stock soars, getting called away from you before you make up your full losses from when it plummeted. It won't take more than a few cycles of this to lose a bunch of money. There's no "free lunch" in the markets. If a given strategy appears to be making a lot of money over a long period of time, it just means the "risk" side hasn't reared its ugly head -- YET. Be careful out there, especially in today's world.
  7. Salsman on “Loss of confidence is good news”

    The article states: "Today's low of consumer confidence presages an improved economy and better stock performance a year ahead. The bearish prognostications heard so often today from Keynesian economists ought to be ignored" Since Mr. Salsman holds himself out as a market forecaster, this can only be construed as a recommendation to buy stocks, meaning, market indexes. Even better is this Salsman article from Sep 23rd 2008: "Our year-ahead forecasts: for the S&P 500 to gain roughly 20% as the Financials gain even more than that." The S&P 500 then promptly fell 30% over the subsequent month -- one of the steepest declines in history.
  8. Salsman on “Loss of confidence is good news”

    Thank your lucky stars for that! If you had listened to Salsman's boneheaded advice and bought stocks on the date of this article, you'd have lost 28% of your money a short 4 months later (And you would have been down 36% at the bottom a couple of weeks ago.)
  9. "What is Consciousness For?"

    Why would a dog appearing to pause and ponder not constitute at least some prima facie evidence in favour of it possessing some power of choice? After all, our knowledge of the existence of consciousness and volition in other humans is based on precisely this kind of inferential evidence.