By Guest Blogger Sinan Terzioglu
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This post is about naked options and short strangles. But please don’t get too aroused. After all, I’m one of Garth’s nerdy financial guys. We don’t get out much.
Following my debut post here, some commenters asked about options. An option is a financial contract giving an investor the right, but not the obligation, to buy or sell an underlying asset at a pre-determined price (the strike price) on or before a specified date (the expiration date). Options are derivatives – their prices are derived from that of an asset like a stock, index, currency or commodity. Institutional and retail investors use various strategies in an effort to improve cost basis, hedge risk and speculate.
At Turner Investments, we don’t utilize any options strategies. They encourage too much trading, and over-trading is one of the most common reasons so many investors underperform over time. Also, frequent trading is expensive, complicates taxes and most importantly trading options can be extremely risky if not used responsibly.
There are two types of options contracts: calls and puts. A buyer of a call option has the right to buy the underlying asset for a strike price on or before the expiration date. The buyer of a put option has the right to sell the underlying asset for a certain price on or before a specific date.
Every option represents a contract between the writer of the option and the buyer of the option. The writer of the options contract “writes” or creates the contract, and sells it for a premium. With a stock or ETF underlying, one option contract represents 100 shares. Option prices, also known as options premiums, are determined by three variables:
- Time – How much time is there until the contract expires. The more time the more value is given to the option.
- Volatility – The more volatile the underlying asset, the more value is given by the market maker to the price of the option.
- Intrinsic Value – Is the strike price of the option above or below the current price of the underlying? For example, if stock XYZ is trading at $105 per share and you are looking at a $100 strike option, you would know there is at least $5 per share in intrinsic value so the price of the option will be at least $5 + time value + volatility value.
Some investors utilize various options strategies such as the covered call and the cash secured put write successfully over time. Both of these strategies requires owning at least 100 shares of a particular stock/ETF (or be willing to own 100 shares) and collect a premium to enter the contract. The premium collected is considered income or a cost basis reduction. The strategy can work well in certain market environments and not so well in others, so it’s never a sure thing. Compared to all other options strategies, these two are relatively much lower in risk.
The problem many retail investors and even money managers get into from time to time is they start to use options to speculate on short term price movements. Various strategies involve significant leverage and unlimited risk – a recipe for eventual disaster. The allure of some of these strategies is that they work well for periods of time and lead some to believe they have discovered the holy grail of trading as money can be earned nearly effortlessly. However, where people get themselves into trouble is not understanding the true nature of market risk especially when combining it with leverage.
One client I worked with was interested in utilizing cost basis reduction strategies for his investment portfolio but as he became more knowledgeable about options, he started using a strategy known as the short strangle. He soon went from investor to speculator. I tried steering him away from this popular strategy but unfortunately he didn’t listen, saying he could handle the risk. The short strangle involves the selling of a put option and the selling of a naked call option which means not owning the underlying asset and taking on unlimited risk on the call side. With this strategy one is betting that an underlying, such as an ETF that tracks the S&P 500, will stay within a range, like +/- 3%, from its current level. The seller of a short strangle collects a premium on each of the put and call options sold. Sellers of short strangles take comfort in the fact that the probability of success can often be 70-80%+ depending on the strikes chosen. The strategy will be profitable if the underlying stays within a range over a certain period of time but the problem is one collects very little for the risk taken.
My former client became increasingly confident using this strategy throughout 2017 and sold more and more contracts so he could collect more in premiums. Compounding the problem for people trading options is brokerages allow you to enter contracts on margin (borrowed money) so those using this strategy expose themselves to enormous leverage when they get overconfident and greedy. Needless to say leverage works well when one is on the right side of it but not so well on the wrong side. Like my former client, many using this strategy don’t understand the options market is priced the way it is for a reason and even though a price move of +/-5% may have a less than 1% probability of happening, it can happen and will happen from time to time.
In February 2018, the markets came under enormous pressure and volatility sky rocketed. My former client had short strangles on the S&P 500 and the puts he sold were now in the money (meaning the market had dropped so he would be forced to buy). He was like a deer caught in the headlights. He had said he could handle the risk but he clearly couldn’t. The market was moving so quickly against him that he basically froze. He didn’t want to lock in losses but desperately wanted to believe that the market would recover. He was kicking the can down the road and even considered selling more strangles to average down. The problem was his account was over levered and he was getting a margin call. Selling short strangles and collecting very little relative to the risk taken is like trying to collect change in front of a bulldozer. Eventually you’re going to trip and get squished. People kid themselves when they think they’ll be able to react to the sudden price movements of a plunging market. My former client had unfortunately devoted a decent amount of capital to the strategy and as a result was cleaned out.
Even so-called professional managers make the same mistakes. One recent example cited here a few weeks ago was of a hedge fund manager selling uncovered call options on natural gas futures and losing all $150 million of his client’s money. That has to be one of the most ridiculous strategies ever used by a pro because selling uncovered calls on a commodity that can easily swing +/-10% in a given day is pure gambling.
When something seems too good to be true in the financial markets, trust me, it is. The only free lunch in investing is diversification. That’s why we build balanced and diversified portfolios and leave the speculating to others. No strangles. No nakedness. Sorry.
Sinan Terzioglu, CFA, CIM, is a financial advisor and licensed portfolio manager with Turner Investments, Private Client Group, Raymond James Ltd.
91 comments ↓
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Pink Snow falling in Vancouver.
I could do a Race to a million post with this one, but I have reported on this one 5 or 6 times as I live nearby, quite the mess, the elderly neighbor died after struggling to sell it originally, and now these speculators are struggling to exit the market.
The details…
904 e37th ave,Vancouver.
Paid 1.2 August 2017
Originally asking 1.49
Now asking 999k
Assessment 1.40
So this is the second time they have tried the 999k thing.
Last time they tried it, sometime in early 2018 I think, the neighborhood turned into a nuthouse as not much was available for around 1 million at the time.
Market sentiment was better back then, as was the weather.
If a developer had bought it instead of these guys a new house would sit there now instead of this deteriorating structure.
Still liveable,but never had the best maintenance schedule…
M44BC
https://www.zolo.ca/vancouver-real-estate/904-east-37th-avenue
Lower.
I’m not sure what’s going on but I found this interesting.
Last Friday I reported this detached sold for 925k after seeing preliminary confirmation.
Evidence in the photo.
https://pinksnow103480648.wordpress.com/2019/02/12/lower/
Now they are reporting the sale price was sub 900k at 890k.
How does the sales price change magically?
Dunno.
Good for the buyer I guess as it takes a while for most people to save the 35k in between the two numbers.
I can only report, the numbers given at the time but as I stated the other day this is another scenario showing why it’s important to do the CONFIRMED PINK SNOW post just to double check that porkies aren’t being talked at sale time.
Not my job but The Sell Squad can seemingly do whatever they want…
M44BC
https://www.zolo.ca/vancouver-real-estate/1578-east-22nd-avenue
Recent sale report.
As if you need any more examples of how nutty things got the last few years, these guys managed to get the best part of 2.5 million for a 13 year old townhome out of someone and still took a loss.
The details…
4475 w 9th ave,Vancouver.
Paid 2.63 May 2018
Sold 2.48 January 2019
Originally asking 2.64
Assessment 2.48
So someone agreed to pay the assessment number to soften the blow but they still got whacked for 300k.
Hopefully for the sake of the new guys they don’t try to flip it next year or else we will have to re-visit.
That goes for a lot of knife catchers on the Westside.
It’s still the biggest game in town.
Now it’s just more of a grind.
Old habits die hard…
M44BC
https://www.zolo.ca/vancouver-real-estate/4475-west-9th-avenue
https://www.rew.ca/insights/592816/4475-w-9th-avenue-vancouver-bc
An excellent summary of the option casino with the risks involved. Maybe next time you might consider the selling short of stocks without a stop in place.
RE:
#1 The Greater Cauliflower on 02.12.19 at 4:52 pm
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pffft… You’d probably censor ‘Animal Farm’ as well.
You were doing great until you got to the spiders. – Garth
” My wife and I tried Kinky Sex….Ya. She tied me to the bed and then she went down town”
Rodney Dangerfield RIP
I sold my palladium coins yesterday for $1680 an ounce I bought them 11 years ago for $458 an ounce. I don’t understand why the value is so high
the guy had it wrong, you buy puts to protect the downside, and sell call to rent out your stock, if stuctured correctly you will never loose, these guys take a little bit of knowledge and blow their brains out on margin etc.
just be like a bank, secure everything, diversify, and make little money every day or two days with the spy.
i always dislike these examples of options as well as the guy who bought the out of money and it was up like 10 times. neither of those are the correct approach.
bsically this this the deal, you trade off the dividend income for 100% security of not loosing your money, then you sell the volaltility and collect the premium on a diversified portfolio. it does work i know personally
dont go on margin, dont get greedy, dont overthink it
Re: palladium price. It is actually a useful metal, mainly for catalytic convertors and pollution scrubbers. Ever-rising environmental laws and middling production from mines results in greater demand and thus greater prices.
Having said that, I don’t recommend a rush to buy now. The time to buy was when it was $350 per troy ounce, not in today’s rising market. It’s like GTA or Lower Mainland houses. Those who lost money waited until 2017 near the peak of the rise to buy spec condos. Precious metals should only be bought when bouncing along the bottom. Silver might be there but the other three PMs are well back up.
Housing Market Crash 2.0: The Jury is in for 2018-2019
https://www.investmentwatchblog.com/housing-market-crash-2-0-the-jury-is-in-for-2018-2019/
Wouldn’t the way out of mitigating the risk of a short strangle be to cover each put and call with an “insurance” buy of a further OTM call and put. Using different time time scales ,finer time scales to focus on pivots in larger scales, along with Candlestick patterns, (bullish /bearish), along with choosing close to expiration date , may reduce the risk further?
I had a friend who told me he was going to trade options. I told him he should use a cash account so he could write off his losses. He responded that he had no intention of losing money and I should keep my stupid advise to myself. Over-confidence can be costly, especially for the amateur.
CTV at 6:00 PM ET on the net site will be going live from Winnipeg for a question period with our glorious PM answering questions from the audience. This will be good drama in the making lol.
What about Exxon-Mobil and their 6+ billion barrel oil finds in the Caribbean and South Africa?
Those countries gave very favourable terms as they are newbies in oil and gas. Does this translate into high profits for the next decade?
naked strangles? isnt that how the lead singer of INXS died?
https://en.m.wikipedia.org/wiki/Michael_Hutchence
Pink Snow falling in West Vancouver.
Showed these guys a few times and their crisis continues to deepen.
The details…
1027 Clyde Avenue, West Vancouver.
paid 3.16 April 2016
Originally asking 3.48
Now asking 2.69
assessment 3.02
So they took a time-out, took 200k more off and now it’s desperation time.
I always said these guys are going down like Bonnie and Clyde.
They made a big mistake.
Hopefully they will live to fight another day…
https://www.zolo.ca/west-vancouver-real-estate/1027-clyde-avenue
https://www.rew.ca/insights/57599/1027-clyde-avenue-west-vancouver-bc
SELLING call options is a conservative low risk method to increase yield in a portfolio
This is a basic truth Simon. Also is a terrific strategy if a market is getting toppy .
Tangent time :
Is Canada becoming more and more soft ? If it snows schools close ? I’d walk through snow storms as a 10 year ago 40 yrs ago . What has happened to This country ?
#13 Ray on 02.12.19 at 5:31 pm
Buying out of the money puts and calls on a strangle would define the risk and turn the strategy into what is known as an iron condor. This would help reduce the odds of suffering catastrophic losses so long as you position size responsibly but the cost of the insurance would limit potential gains. The trouble with this strategy is you once again are risking a lot more than the maximum potential gain – Sinan
The rear naked strangle. I have seen it in action. Smokey was ahead on points until that slippery mud covered dwarf at the Mud Rasslin’ Pit put the strangle on him last time out. Tapped out right away. She was real slippery.
#20 Sinan on 02.12.19 at 6:16 pm
#13 Ray on 02.12.19 at 5:31 pm
Buying out of the money puts and calls on a strangle would define the risk and turn the strategy into what is known as an iron condor. This would help reduce the odds of suffering catastrophic losses so long as you position size responsibly but the cost of the insurance would limit potential gains. The trouble with this strategy is you once again are risking a lot more than the maximum potential gain – Sinan
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Thank You.
Question: Why would Garth need an “Options Guy”?
As a CFA and CIM, plus former VP for RBC Capital Markets in New York, Sinan is a vastly experienced equity market analyst and licensed portfolio manager. Why wouldn’t I want him? – Garth
Great Post Sinan.
I trade options regularly. I tend to stick to covered calls on stocks that I would generally own long term, but I add risk by owning more than would be reasonable for my portfolio size. Downside of course is if the stock rises rapidly and you get called out of most of your position. Or, some negative news comes out and the position falls substantially, but that risk is always there.
I also trade leaps. This has proved to be very successful. I simply find undervalued stocks, and rather than purchase the stock, I purchase long calls. Take MFC, if I assume it is undervalued and will hit $30 in the next two years, I would buy the Jan 2021 $17 Call for $5. If the stock is over $22 by Jan 2021 then I make money. Of course, if it is below $17 I lose everything. Hence the focus on getting undervalued stocks.
The last trade I tend to do is the opposite of the short strangle. I find a very volatile stock (easier to do these days than undervalued ones). Then I buy an at the money call and put, usually paying a huge premium and hope the stocks fluctuates enough to cover the premium. Lately this works well with weed stocks. Once a few more earnings comes out, this trade is best avoided as people will have a better idea what the stocks are really worth.
Most important thing when trading options is to keep the option account and your regular retirement account separate. I also try to keep the balance of the option account to no more than 10% of the portfolio. It never hurts to funnel off extra gains to something else.
Kilt.
Garth,
As head coach of this outfit, all you have to do is open the gate and let 3 lines roll. Equal ice time. Let Sinan dangle with the puck as much as Dougsie and and Ryzie.
A winning formula.
Thanks,
WUL
Interesting information Sinian.
Not for me.
Too much risk I’m afraid.
Does the massive derivatives market worry any of you Bay Street number crunchers?
https://www.aol.com/2010/06/09/risk-quadrillion-derivatives-market-gdp/
….. and could the whole derivatives market bring everything down???
@#19 Sam
“Is Canada becoming more and more soft ? If it snows schools close ? I’d walk through snow storms as a 10 year ago 40 yrs ago . What has happened to This country.”
++++
I live in Burnaby and work all over the Lower Brainland.
Today I went to North van at 8am.
A breeze. Roads plowed and all the cowards stayed home. 20 minutes door to door.
I left North Van at 12:35 and was back in South Burnaby at…. 12:47…. 12 minutes.
I caught every green traffic light .
A rare , enjoyable drive in the Lower Brainland.
We should have more snow dumps.
First rule: Don’t blow up!
Well well boys look what we got ‘ere.
No frosted tips: Check
No chix car (911): Check
Big-Beta BSD strategies: Check
I think we got an Alpha blogger dogs.
I’m just going to call you ST. Your name is way to hard to spell. Won’t even try to pronounce it.
I agree over trading kills you. People are still tweaking algos, having a difficult understanding the current metrics driving the markets.
I’m going to help you out buddy. You don’t come across as fancy panzee Doug and Ryan. I like that.
It’s like this ST. When “America first” is winning. Risk On!!
When the Demon-crats are winning Risk Off
Dr Smoking Man
PhD Herdonomics.
“There are two types of options contracts: calls and puts.”
=====================================
At the end of the day, Is it fair to say that options are a zero sum game ?
That was a great post.
“Collecting change in front of a bulldozer”
That’s gold jerry, pure gold
We hope the Government keep the stress test and include private lenders as well to keep Canadian Housing in controlled and good shape by avoiding a big crash or disaster.
https://www.huffingtonpost.ca/2019/02/09/mortgage-stress-test-amortizations_a_23665668/?utm_hp_ref=ca-business
But arbitrage lol
I think the best bet is to sell your contact to someone willing to buy the stock at the set price. This limits your need to have more than 5% or 20% capital and proceed with the transaction cost.
I started to learn the math behind pricing options but decided I’m not willing to risk……
In the USA their are a record number of people more than 90 days behind on their car loans, 7 million of them.
More than during the Great Recession.
The article goes on to say that people prioritize paying their car note above even their mortgage as they must have a car to get to work/work.
Canary in the Trump mine.
Also, the national debt just tripped 22 trillion
Sinan, there are other option strategies where risk can be limited. Ex Credit Spreads and Iron Condors.
Not everybody has to make the same mistakes as your client.
Options are a tool. A hammer is a tool. A hammer is dangerous, but that does not stop a carpenter from making money with it safely. The same goes for options.
Look at King Ford helping keep his election promise of the most importance
Gaze upon this sunfull packaging, its pedigree of unknown provanence, surely flavored to an approximation of Lefty’s Tears; who first will sully their gullet and heft this Working Man’s brew into its final destiny?
https://www.blogto.com/eat_drink/2019/02/no-name-buck-beer-toronto/
#29 AK on 02.12.19 @ 7:26 pm
Options are considered a zero sum game because if an option goes up or down only one of us can be right but that assumes that each of us doesn’t do something on the other side. For example, suppose you buy a put from a market maker who would now be short the put (therefore have a positive delta which means long the stock). The market maker may hedge their risk by shorting the stock and have a delta of zero. Even if the stock drops and you make money on your put purchase the market maker would not necessarily lose money because of the hedge so options are not a zero sum game – Sinan
Too sophisticated for this crowd – they like pink snow and casinos here.
re: GST from yesterday
re GST
I recall the intent of the GST was to reduce the Manufacturers tax from 13% to 8% so as to increase exports, it was also supposed to be revenue neutral
Not selling cash secured calls to enchance returns on portfolio (or selling puts to lower cost basis when looking to go long a security) is basics of money management.
I don’t get it why a money manager wouldn’t do it every expiration cycle. Is it laziness? Maybe scared that clients learn how to outperform all the managers by selling covered calls?
I have a small position in a fund that buys bank preferred shares and sells “covered calls” against them. I’m comfortable with the position even though I know Garth hates it because a) the position is small, and b) the calls are covered, and c) the fund collects the dividends as well as the premiums. I won’t lose my house and the biggest risk is not participating if the stocks run up past the strike price. The fund still gets all the money up to the strike price plus the premium and dividends back so it doesn’t technically lose anything, it could just “miss out” on any gains above the strike. But “Fear Of Missing Out” (FOMO) isn’t a good trading strategy either. It still makes money, just not as much. But you haven’t made any money until you sell. Until you sell, all you’ve got is numbers on a spread sheet and no numbers in the bank. Anyone who has ever held a garage sale knows this. That TV stand you paid $300 for? Used it’s worth $30 even though there has been absolutely no wear and tear, it’s identical to the way it was when it came out of the box. Or try selling an old piano. You can’t even recover enough to pay the movers, even though it still looks and sounds great. So what is my wife’s 1939 upright grand worth? It’s beautiful and fully functional, but it’s worth zero unless she’s playing it. I believe if you were to try and build this beautiful instrument today, you couldn’t buy the mahogany for what it can be sold for so all the labor, the sound board, the strings, the keys, the mechanics of the hammers, it’s all free. In fact, there is probably a profit to be made buying old pianos just for the mahogany and making coffee tables and picture frames out of it, and recycling the sound board. So how much is the piano worth?
(PS this is also the overriding reason a “wealth tax” is a stupid idea, for anyone who may have read one of my previous posts. Nobody really knows what anything is worth until they sell it. Is Jeff Bezos really worth $130 billion? There is no way to know until he sells. And I am not even really getting in to the issue of the fact that a “wealth tax” would mean that nearly everybody with any money would have to disclose their so called “wealth” to the government every year even if they didn’t have two sticks to rub together, and all of the consequent appraisals and auditing. The cash flow is much easier to track because it is real and does not depend on a willing buyer, or at least the buyer has already paid for the goods or service. Or how do you impose a “wealth tax” on Donald “the bad orange man” Trump? Sure on paper he’s wealthy but his liabilities exceed his equity. If things go south the banks are the ones that own all his assets. Should they pay a “wealth tax” on the amount of the loans? A “wealth tax” is a horrid idea, because unless you have a great big pile of gold coins in the basement like Scrooge McDuck, all you have is a bunch of important farm equipment sitting around on you land. It’s not money. If we force the farmers to sell their tractors because of a “wealth tax”, things cannot get better. And who will buy them? I don’t need another tractor. Certainly not a used one.)
#22 Ray on 02.12.19 at 6:54 pm
#20 Sinan on 02.12.19 at 6:16 pm
#13 Ray on 02.12.19 at 5:31 pm
Buying out of the money puts and calls on a strangle would define the risk and turn the strategy into what is known as an iron condor. This would help reduce the odds of suffering catastrophic losses so long as you position size responsibly but the cost of the insurance would limit potential gains. The trouble with this strategy is you once again are risking a lot more than the maximum potential gain – Sinan
—-
Thank You.
Question: Why would Garth need an “Options Guy”?
As a CFA and CIM, plus former VP for RBC Capital Markets in New York, Sinan is a vastly experienced equity market analyst and licensed portfolio manager. Why wouldn’t I want him? – Garth
——-
That makes sense. To me, at first glace, it seemed like an oxymoron, as options,to me, is all about trading.
Thank You
Definitely risky, but options can be great for reducing cost basis – so maybe not avoided all together. Make sure you have your balanced and diversified portfolio as your foundation, but when picking up bargains, options can be great.
Ex. BNS (US$) 50 Jun19 puts are going for $0.55-$0.75 with an open interest around 600+… if it doesn’t drop to your strike price (10% drop – so pretty unlikely) you keep the $0.55/share. Even if the stock was put to you, you’d be securing a great dividend stock, collecting $0.55/share, and reducing your cost to 49.45/share (which would have you lock in 5.1% div yield). I guess I’m excluding brokerage fees, but they’re usually only $10 for the first contract and $1 each additional.
I’ve always liked naked puts for purchasing individuals and CC’s after purchase.. usually a strike or two oom.
#71 Nonplused on 02.11.19 at 7:47 pm
Remember, the average life expectancy without a nuclear war is something like 85 years. That means 50% of the people die younger. Well that would be if 85 was the mean, but I think it’s approximate.
____________________
Um, no. You seem to be mixing your medians with your means.
No doubt you know about Bill Gates walking into a room and instantly, on average, everyone becoming a millionaire.
Medians are another story altogether…
I find it outrageous that the words naked, aroused, risk, expiration date are used on a financial blog
#35 TurnerNation on 02.12.19 at 8:16 pm
Look at King Ford helping keep his election promise of the most importance
Gaze upon this sunfull packaging, its pedigree of unknown provanence, surely flavored to an approximation of Lefty’s Tears; who first will sully their gullet and heft this Working Man’s brew into its final destiny?
https://www.blogto.com/eat_drink/2019/02/no-name-buck-beer-toronto/
—
I was about to post a “same” earlier today but i newer got to it.
Recently i got few bottles of Deschutes Black Butte Porter XXX, aged in whiskey, most likely bourbon barrels, oh man that beer is something. Interesting thing about this beer, when it’s poured releases sweet bourbon caramel-ish, brown sugar-ish smell, some dark beer bitterness that fades fairly fast, sweetly and flavorful. Me like it, a lot! Not for the faint-hearted beer drinkers, it packs 14% abv. Best at room temperature.
There are few bottles left in stores dwntwn.
As for No Name buck a beer, i am thinking they should sponsor me i’ll be glad to use it and promote it as a working man best lawnmower beer. Heck for few free cases ill even write well informed op-ed about it.
I fully agree. It’s a lot of fun though impressing a client with basic knowledge of Black-Scholes stock option pricing and how this midas formula supposedly calculates the optimal price of an option. So much fun. Until the client understands that about dozen assumptions must apply in order for this Nobel-price winning formula, which necessitated the world’s first government-organized (but private) bail-out (of LTCM), to apply. Option theory is beautiful, but in practice not useful anymore (if it ever was) in a field dominated by professionals who all apply the same sophisticated knowledge – all that remains is the hefty fees one has to pay for them. So, agreed, stay away from options. Unless, of course, one has insider information that is bound to result in a gain, in which case leverage through options and other means will magnify the lease – if you manage to stay out of prison, that is.
#43 “I find it outrageous that the words naked, aroused, risk, expiration date are used on a financial blog”
But you are not shocked about the words naked and strangling in the same sentence? That is beyond kinky!
Interesting read. Didn’t know they were guest writers on weeknights.
Last couple years I had a winning streak of 8 profitable options trades (some calls, some puts); small positions of $1,000-2,000 each.
I followed that up with a losing streak of 3 which gave back all my profits. I don’t do them any longer as I hate ‘gambling’. I prefer the ‘optionality’ of a pure equity ETF (since they come without expiration date).
After all, I never really wrong – just ‘early’! LOL
Too damn hard to be both right on the price AND the time.
—–
“The only free lunch in investing is diversification.”
—–
Yeah, but who’s eating for ‘free’?
TCC
So T2 and friends have decided to build a border wall with Colorado.
After all, it is necessary.
We are not safe.
They keep sending up this nasty, dangerous weather.
Our national security is at risk.
Colorado border wall now! Spread the word….
“Selling short strangles and collecting very little relative to the risk taken is like trying to collect change in front of a bulldozer.”
——-
Excellent use of heavy yellow iron in explaining financial risk.
They do squish well :)
Most people, when hearing about a woman without shorts making naked calls would assume her risk profile is that she might end up strangled. A financial dude would just see this as a risk-free arbitrage opportunity. No wonder so many financial business deals take place in strip joints.
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Why try to make money honestly when the Trudeau encourages graft , theft and a nebulous justice system where prosecuting rich crooks who make donations to Trudeau are never convicted.
https://vancouversun.com/news/staff-blogs/real-scoop-more-b-c-money-launderers-convicted-in-us-than-at-home
Trump has no such problem, convicts more crooks than Canada.
#29 AK on 02.12.19 at 7:26 pm
“There are two types of options contracts: calls and puts.”
=====================================
At the end of the day, Is it fair to say that options are a zero sum game ?
————
Agree,
After the hockey game, one team won and one lost.
From the article… “It’s Quebec. A federal election is coming. Do we really imagine nothing would happen when Lavalin could end up in criminal court?
This pattern is so predictable that I find myself wishing the Liberals would try some tricky behaviour to get Trans Mountain moving. At least we’d know they care.”
https://calgaryherald.com/news/politics/braid-rule-of-law-gets-shaky-when-quebec-liberal-votes-at-stake
It appears T2 upset a lot of Canadians with his speech in Winnipeg. In another hour the comments might go over 7,000. I have no idea why they want our beloved PM to resign, because he has been doing such a great job for us all. Can you imagine what they are saying? Its not my circus to demonize or suggest he threw Jody under the bus by blaming her for everything while taking questions from the press in a bus garage. I have noticed that our First Lady is MIA for the past few months which has never happened before too. Will this ever end well?
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#43 Stick To What You Know
Mean, median, mode, standard deviation. It’s all average to me unless I am getting serious with a spread sheet.
I like your Bill Gates joke though. It reminds me of the statistician drowning in a river of average depth 6 inches.
It also applies to the common trope that 50% of the population is below average IQ. But that assumes IQ is standardly distributed. If it’s log-normal, which it appears to be, more people are below average IQ than 50%. Ah, math. It’s so fun. If IQ is distributed like wealth, which it turns out it very well may be but not as extreme, most of us are dummies.
# 31 – When are people going to wake up and realize the real estate industry doesn’t give a hoot whether you or I or anyone else can afford to buy a home, they only care about their commission.
A little over my head but interesting post.
Question: do you have to actually own the underlining to buy and sell its option?
MF
#19 Sam on 02.12.19 at 6:08 pm
I don’t think it’s about Canada becoming “soft”. There are probably two factors for the school closures:
1) The population of the GTA has increased from 20 years ago. A storm in the GTA affects more people now than it did before.
2) Schools and workplaces have learned to fear lawsuits related to this kind of thing, and are more likely to close to prevent it.
Just my thoughts.
MF
If you aren’t going to dynamically adjust your delta risk there really isn’t much reason to be using options. And you can’t do that as a retail investor, so, don’t trade options.
The purpose of options is to allow you to play implied volatility against realized. That can actually be a good way to trade, and there is edge to be found there.
#24 crowdedelevatorfartz on 02.12.19 at 6:58 pm
Interesting information Sinian.
Not for me.
Too much risk I’m afraid.
Does the massive derivatives market worry any of you Bay Street number crunchers?
https://www.aol.com/2010/06/09/risk-quadrillion-derivatives-market-gdp/
….. and could the whole derivatives market bring everything down???
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The numbers thrown around in these reports are always GROSS numbers. This makes a huge difference. If a trading desk is long a 100mio EURUSD option with one bank and short the same 100mio EURUSD option with another bank, the exposure would get listed as 200mio EURs. But that’s not really right. The risk here is purely on the counter party side for the trading desk, and since the GFC banks are much more cognizant of that risk and take steps to mitigate it.
#19 Sam on 02.12.19 at 6:08 pm
#62 MF on 02.13.19 at 7:12 am
Hey Sam, 40 years ago a lot of things were different, were you walking to school, up hill, both ways in a city of 2.7M? There have been 3 closure days since 1999 in Toronto, I remember 2 day school closures for one storm when I was a kid…
rknusa on 02.12.19 at 8:33 pm
re: GST from yesterday
re GST
I recall the intent of the GST was to reduce the Manufacturers tax from 13% to 8% so as to increase exports, it was also supposed to be revenue neutral
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That is how I remember the relationship too.
It was not a revenue neutral change-over for those of us with access to a commercial fish license number because many items could be bought exempt from the 13% hidden tax.
But the GST became a new tax on things that required labour.
And now a magical situation has GST charged on the BC carbon tax. A tax charged on a tax. Carbon tax is not a goods nor a service.
No neutrality there.
I guess Garth took a snow day.
It only snows in Vancouver. – Garth
Easy solution to getting called on margin: just let the call go to voicemail.
50x leveraged calls YOLO.
So many posts from Smoking Man get deleted… am I the only one that wonders what they say?
Those lying wankers in the media and Ottawa are hiding the fact that personal finances in Canada are way worse than reported through the slime like CBC.
https://vancouversun.com/news/staff-blogs/real-scoop-more-b-c-money-launderers-convicted-in-us-than-at-home
#68 Unhinged Trader on 02.13.19 at 9:24 am
Easy solution to getting called on margin: just let the call go to voicemail.
=======================
HAHAHA!
Yes, you do that. Then watch them arbitrarily buy and sell whatever they want in your account until the balance reaches neutral.
Been there, done that. Dealt with the MESS afterward.
Kind of like when you were a teen and your mom cleaned up your room for you after having told you three times to do it yourself. Where did all those…’car’… magazines go anyway?
#66 Russ on 02.13.19 at 8:52 am
No neutrality there.
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Maybe not neutral but a lot more visible, BTW why were we paying for your free ride as the language you are using suggests that exemption was used for a lot more then legit business expenses maybe?
The tax on a tax is a real problem I agree in terms of fairness, though your Carbon tax dig is the least of it…
#4 For those about to flop… on 02.12.19 at 5:01 pm
Recent sale report.
4475 w 9th ave,Vancouver.
Paid 2.63 May 2018
Sold 2.48 January 2019
Originally asking 2.64
Assessment 2.48
https://www.zolo.ca/vancouver-real-estate/4475-west-9th-avenue
https://www.rew.ca/insights/592816/4475-w-9th-avenue-vancouver-bc
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Actually, the seller is lucky to get out of this mess only with $300k loss. The new owner will experience a significant devaluation of the property and will have rough time going forward.
They’ve got lemonade.
It’s not Pink Lemonade, but it will do…
M44BC
“Visualizing the Funding Behind the Most Innovative Fintech Companies.
The most innovative fintech companies have two things in common. They’re getting a lot of attention from investors, and they’re using technology to dramatically simplify financial transactions.
That’s our conclusion from reading a new ranking from Forbes on the most innovative fintech companies in 2019. And when you pause to consider what each company is trying to do, it’s easy to see why investors believe there is significant value to be had in competing against traditional players.
Fintech companies focused on processing payments are receiving the lionshare of outside investments, according to a new set of figures from Forbes.
Companies built on the blockchain and cryptocurrencies are also a distinct and growing category in the fintech world, earning more than $1B in investments.
Regardless of industry, the most innovative fintech companies are using technology to make previously complex or difficult tasks incredibly easy for consumers.
Forbes only looked at private companies in the U.S., broadly defined as either a physical headquarters, an operational presence or a target market of American consumers. We created a bubble according to the size of each company’s funding, then we color-coded and grouped each one based on the main type of business it conducts. We added the logos for easy reference, letting you quickly see where the biggest action is for fintech companies this year.
39 companies received more than $100M in outside funding, led by Opendoor at $1B. Remember, these are not total valuations, which would all be significantly higher. In fact, according to Forbes, 19 out of the 50 are valued at $1B or more. Instead, these figures indicate investments that people and companies are making into fintech. All told, there’s over $11B represented in our visualization.
In terms of market dominance, payment companies are taking the lionshare of funding, totalling some $2.94B. Stripe ($685M) is the obvious standout with a global business centered around making it easy for businesses to accept payments from customers. The company is valued at an incredible $23B. That’s more than twice its value the last time we wrote about Stripe just 16 months ago. We’ll have to see how its involvement in the investigation into President Trump’s inauguration influences future investments.
The personal finance industry is the second leading category in private fintech investments, most notably Credit Karma ($869M). Any company that successfully makes it easy to manage personal finances will no doubt attract a lot of attention from investors. We should also mention Lemonade ($180M), a company that’s disrupting the renters and homeowners insurance industry by using analytics to approve applications and process claims.
There are lots of other cutting edge tech companies in our visualization too. Robinhood($539M) offers $0 commissions to trade individual stocks, making it fast and easy to trade on a smartphone. Betterment ($275M) provides consumers with a tailored financial advice to fit their individual needs. And then there are a number of cryptocurrency and blockchain companies, like Coinbase ($525M), one of the leading platforms for buying and selling bitcoin.
Categorizing companies like this will always be somewhat arbitrary. For example, you can buy bitcoin on Robinhood, but we’re still calling it an investment company because you can also buy traditional stocks and mutual funds. It’s still a useful exercise because a small but growing group of companies using blockchain technologies is threatening to disrupt a variety of different industries. The five companies shaded red on our visual have already received over a combined billion dollars in funding. We’re betting they will continue to grow and challenge the underlying business models of more established companies.”
11 February 2019
Visualization
https://howmuch.net/articles/worlds-most-innovative-fintech-companies-2019
#69 232 on 02.13.19 at 9:33 am
So many posts from Smoking Man get deleted… am I the only one that wonders what they say?
…..
You and me both. After the sun goes down and my buddy Jack Daniels pays me a visit.
I’m looking at the deletes. Have no idea what I wrote either.
Great article, i learned lots. This guy should be writing more. Garth please let him educate us more on stuff like this.
Thanks
40% of Canadians don’t pay income tax (source OECD). Whoah! That’s a lot.
Recent sale report.
Who knows what these guys were up to with this condo flip gone wrong,but they were made to pay.
The attached market is not as forgiving as the previous two years.
The details…
2308-8031 Nunavut Lane, Vancouver.
Paid 963k January 2018
Sold 867 January 2019
Originally asking 989k.
Assessment 1.02
So they picked it up in January 2018 and had it back on in October for a number that was never gonna them whole.
Could be yet another one where life took a turn for the worse and now they have to deal with this mess on top.
15% loss on a condo, or 150k.
I’ve seen worse but you don’t see it that often in Vancouver, more likely an older unit or a pre-sale in places like Richmond and Burnaby.
People want to believe the attached market can plod along while the bulk of the carnage is in the detached segment.
Mr Market is having Nunavut…
M44BC
https://www.zolo.ca/vancouver-real-estate/8031-nunavut-lane/2308
#75 Dups on 02.13.19 at 11:54 am
Great article, i learned lots. This guy should be writing more. Garth please let him educate us more on stuff like this.
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This blog is hardly the place for the fine details, what matters, when not trading index ETFs.
There are plenty of good books, tutorials, courses on options trading. Learning it needs time and effort to invest, before touching the money.
#11 DaleFromCalgary on 02.12.19 at 5:24 pm
Re: palladium price. It is actually a useful metal, mainly for catalytic convertors and pollution scrubbers. Ever-rising environmental laws and middling production from mines results in greater demand and thus greater prices.
Having said that, I don’t recommend a rush to buy now. The time to buy was when it was $350 per troy ounce, not in today’s rising market. It’s like GTA or Lower Mainland houses. Those who lost money waited until 2017 near the peak of the rise to buy spec condos. Precious metals should only be bought when bouncing along the bottom. Silver might be there but the other three PMs are well back up.
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We are full of spec condos here in the GTA. This is what you get with the careless renters in high rise apartments & condo dwellers. Air bnb’s are going to create havoc. When you live with renters they have no cares at all about maintaining the quality of the building or their responsibilities towards others. The attitude is its not mine I don’t own it so I don’t give a $hit. Expect more of this sort of delinquent stuff and insurance rates to raise. I have to wonder was she high on pot at the time?
https://www.msn.com/en-ca/news/crimeincanada/woman-19-accused-of-throwing-a-chair-off-downtown-toronto-balcony-turns-herself-in/ar-BBTx3Ui?li=AAggNb9
Options??? What a strange and kinky diversion from the Prime Objective of this Blog, which I thought was supposed to be busy praising the Great American President, Donald J. Trump. Oh well, okay, I’ll play along.
OPTIONS
Clever financial types from Wall Street like to make up (“derive”) all sorts of clever so-called “financial products” and “financial services,” since they are congenitally incapable of doing anything truly useful with their lives, such as farming or building houses. They want to come up with ways to relieve the productive members of society of their hard-earned money. They usually do this by making false promises of being able to help people to make even more money even more easily. Thus, derivatives like options are created. Then, the productive members of society who fall for the false advertising lose their hard-earned money to the useless financial parasites. Options are marketed to the gullible by telling the buyers of options what a splendid thing they are to buy, and by telling the sellers of options what a wonderful thing they are to sell.
The practical problem is that options are a zero-sum game with a commission charge thrown in. While the options gamblers try to take away each others money, the brokers collect their commissions. This helps to explain why figures of 90% to 99% losers are typically bandied about. This reported range gives people the false impression that they have up to a one in ten chance of being successful trading options. Unfortunately for them, the true range is probably more like 98% to 99% losers. My personal guess in the light is 99% losers, since that is typical of these sort of things. In the options game, intelligent people with PhDs in mathematics tend to take away the money from people who just think that they are smart, and who just think that they know what they are doing, and who just carelessly assume that the wolves of Wall Street are there to feed them rather than to eat them. If the losers gamble enough, they can fondly remember and brag about some rare winning option trade that they once made, and try to forget about all the losing trades that wiped them out.
Unless someone really knows what they are doing and has some special circumstance, gambling with options will just waste their time and money.
The Only Logical Conclusion of The Matter: The only really good option that people were ever given was to vote for President Trump.
The only dealings I’ve had with options is selling a covered call every now and then. The only time it’s worthwhile is when there’s bullish sentiment and a lot of investors expect stocks to go higher in the near future so the call has a higher price. Also, if for example you sell a call on stock X at $10, understand there’s a chance it will go above that level and you lose the opportunity to sell it for more. My experience is that about half the calls I’ve sold will be exercised by the buyer. While I’ve been to naked beaches and actually did a naked skydive many years ago (nothing but the “bare” essentials), I will NEVER try selling a naked call option. Never, never, never, never, never, period.
#81 Doug in London
You value more your money than your bare essentials?
You have to set your twisted values straight :)
I must admit that I am a bit of an options bug.
I find it annoying that people say options are risky.
They just dont understand how they work, and dont care to learn. everything in this money game is risky,if you dont know how to use them.
I started using options with commodities 30 years ago.
Couldnt seem to figure out how to make them make money.
finally when I tried them with stocks, things went alot better. The reason was that stocks didnt expire. with commodities you had to be right on direction AND timing. I like selling naked cash covered puts to get into a position, and covered calls to get out. I have rarely been exercised on the call side, just roll out to the next month or 2. With commodities like corn, you had to roll the underlying contracts also.
Options are a tool, nothing more. It amazes me the number of ‘experts’ on BNN that ignore options as an investment tool. ‘Too risky’,, fluff.
#83 slick on 02.13.19 at 2:50 pm
I must admit that I am a bit of an options bug.
I find it annoying that people say options are risky.
They just dont understand how they work, and dont care to learn. everything in this money game is risky,if you dont know how to use them.
I started using options with commodities 30 years ago.
Couldnt seem to figure out how to make them make money.
finally when I tried them with stocks, things went alot better. The reason was that stocks didnt expire. with commodities you had to be right on direction AND timing. I like selling naked cash covered puts to get into a position, and covered calls to get out. I have rarely been exercised on the call side, just roll out to the next month or 2. With commodities like corn, you had to roll the underlying contracts also.
Options are a tool, nothing more. It amazes me the number of ‘experts’ on BNN that ignore options as an investment tool. ‘Too risky’,, fluff.
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If your calls are rarely exercised, how are they an alternative to simply selling your shares?
I’ll stick with stocks and bonds. That’s as kinky as it gets.
I just read your post Sinan and it is very informative, thank you.
Garth, like what you are doing with these guest host, adds a certain extra to each blog. Every little bit helps in today’s uncertain times, thanks.
@Ubul, post #84:
Without money, I can’t enjoy doing fun things in my retirement like skydiving, bungee jumping, SCUBA diving, whitewater sports, rock climbing, and other fun things I’ve done. For the record, I’ll spend some of the dividends and capital gains I scored from scooping up stocks when they were on sale, like just before Christmas, by doing my 100th SCUBA naked if not in a cold water place like Tobermory. Yeeeeha!
Tater #86
I roll to a later time, collect the extra premium and wait.
That way I continue to own the stock.
Generally the stock price will go back below the strike price.
Buying options is a tough way to make money,
Not so much selling them.
#90 slick on 02.13.19 at 10:39 pm
Tater #86
I roll to a later time, collect the extra premium and wait.
That way I continue to own the stock.
Generally the stock price will go back below the strike price.
Buying options is a tough way to make money,
Not so much selling them.
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Said every retail punter, right until they blow up.
Tater;
like I said;
‘They just dont understand how they work, and dont care to learn.’
I guess there is no shame in that. There are plenty of things I dont understand and dont care to learn.
Financial advisers ignore options because they can not educate their clients about them. And they shouldn’t. But to discard options as ‘too risky’ is dismissive.
BMO has plenty of covered call and put write ETF’s, that seem quite popular.
I’ll admit that cocktail party discussions about stock options are kind of lonely conversations. I dont even bother.
But at least Garth let an option guy write an article that acknowledges their existence, even though he thoroughly trashed the idea.
As far as blowing up,,, hey I’m still here.
Somebody has to be the contrarian.
Climate change is a farce also.