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B4 The Bell, Humpday July 28


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I used to use primarily straddles, spreads, covered options positions, etc., when the market seemed to move like a herd and was thus slower and somewhat more predictable. I could hold positions longer in hopes of cashing in on both sides of a pivot.

 

Can't be done anymore, thanks to the likes of 990N. The premium hits alone, along with the relatively minor magnitude of the absolute moves of late, make the time and effort, and constant monitor watching, a futility exercise. Thus, I tend to pick a direction, calculate my desired risk/stops, and position myself naked as a J Bird. Basically, it's just one position to worry about picking soap up off the shower floor, rather than two (or more). On a day like today, I broke even. The same trade, as a "spread", would have been a hemorrhoid blaster.

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I should has posted more caveats along with my calendar spread example. I was trying to show some alternatives to simply going long an option and letting the premium melt away. In general options are priced such that the movements of the market will merely burn up the premium and not result in any capital appreciation to the buyer.

 

In the case of APOL I saw an opportunity to get 20 puts for free. But you must understand the cash flows for all possible senarios at expiration. Senario 1 is a price above $80, #2 is a price of $80, #3 is a price below $80.

 

If you plot all these scenarios you will find that the worse case is a price just below $80 at expiration. The Jan puts would have huge premium as they are just in the money and the Sep puts would be nearly worthless. This would be the point of maximum draw down which I estimated at a net loss of less than $1k for the entire trade.

 

As Brian said you must have a good knowledge of trading options to be succesful maanaging this trade. Personally I never hold a front month option in the last two weeks before expiration. The last 10 calendar days are the period of maximum time decay. This a rule I adopted after years of holding options to $0.

 

This simple rule gives this trade a high percentage of working out. In fact the minmum payout is generally the intial $1k credit until the premium starts to evaporate in the final week. Hopefully this clears things up a little. Before trying anything like this make sure you understand the cash flows. The best way is to graphically plot out the net cash flow under the 3 scenarios listed above. You will be suprised at how being short or long options can put you in positions completely opposite to your expectation.

 

For example most mutual funds write covered calls to make a little extra return. Long stock + short call = Short put

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Many business media anal cysts said the market went up after the "strong" report from the Fed's beige book came out. But did those anal cysts read it? :blink:

 

DOW JONES NEWSWIRES

July 28, 2004 3:05 p.m.

By Deborah Lagomarsino

 

WASHINGTON -- The U.S. economy remained buoyant in June and early July, but the pace of growth slowed in some districts amid weaker consumer spending.

 

"Federal Reserve districts reported that economic activity continued to expand in June and early July, although several districts reported that the rate of growth moderated," the Fed said in its latest Beige Book report released Wednesday.

 

Five of the 12 Federal Reserve districts said economic activity had "slowed somewhat," while growth rates in most other districts ranged from modest to solid, the Fed said. Slower growth was reported in the New York, Cleveland, Richmond, Kansas City and San Francisco districts.

The Beige Book is a summary of economic activity prepared for use at the central bank's next Federal Open Market Committee meeting on Aug. 10.

 

The most recent report was prepared by the Federal Reserve Bank of Cleveland and reflects information gathered before July 19.

 

Home construction was "still strong" among most districts. Mortgage originations were reported to be "robust," but refinancings fell further, the Fed said.

 

http://online.wsj.com/article/0,,BT_CO_200...ticle%2Dbody%29

 

Fed's McTeer: Mixed Jun Data No Reason To Change Stance

DOW JONES NEWSWIRES

July 28, 2004 8:00 p.m.

 

SANTIAGO -- Federal Reserve Bank of Dallas President Robert McTeer said Wednesday that recent signs of softness seen in U.S. economic data during June don't mean the Fed should retreat from a stated intention to gradually raise interest rates.

 

McTeer, speaking to Dow Jones Newswires on the sidelines of an economic conference in Chile, said that while some data point to a soft spot in the economy, "inflation was higher than expected," indicating that the Fed shouldn't let its guard down.

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In relation to F/value the Spoo and q's just walked over the cliff!

Japanese Industrial Production fell, sending all of Asia into a tailspin........

 

As usual, all markets are lockstepped, joined at the hip...........

 

The 900-story JPM/One Derivative Colossus keeps growing, now its global.......

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TE,

 

This is good news for "those feeling a little older "and missing

those great old tunes

 

 

 

Herman's Hermits

 

"MRS. BROWN, YOU'VE GOT A LOVELY WALKER"

 

> >

 

The Bee Gees

 

"HOW CAN YOU MEND A BROKEN HIP"

 

> >

 

Bobby Darin

 

"SPLISH, SPLASH, I WAS HAVIN' A FLASH"

 

> >

 

Ringo Starr

 

"I GET BY WITH A LITTLE HELP FROM DEPENDS"

 

> >

 

Roberta Flack

 

"THE FIRST TIME EVER I FORGOT YOUR FACE"

 

> >

 

Johnny Nash

 

"I CAN'T SEE CLEARLY NOW"

 

> >

 

Paul Simon

 

"FIFTY WAYS TO LOSE YOUR LIVER"

 

> >

 

Commodores

 

"ONCE, TWICE, THREE TIMES TO THE BATHROOM"

 

> >

 

Marvin Gaye

 

"I HEARD IT THROUGH THE GRAPE NUTS"

 

> >

 

Procol Harem

 

"A WHITER SHADE OF HAIR"

 

> >

 

Leo Sayer

 

"YOU MAKE ME FEEL LIKE NAPPING"

 

 

 

The Temptations

 

"PAPA'S GOT A KIDNEY STONE"

 

 

 

ABBA

 

DENTURE QUEEN

Hey Sled Dog,

 

How about some Punk Rock for us kids?

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I have been locked out for 40 F'n minutes-they turned the death ray on at the same time they jammed. I was stopped for a small loss and that last turn inverted. Window opens now and runs to the bell!

Maybe it's a worm that takes control of millions of computers, logs on to trading accounts and issues buy orders. since the trades make money, no one complains. :lol:

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HGX settin' up for another attempt at the cliff edge..

HGX definitely has one foot well over the cliff edge. :ph34r: :ph34r:

 

In addition to the coughing and sputtering MoGauge, here is another important data point:

 

Mauldin points out that ...

 

"The housing construction market is slowing. Indeed, inside of yesterday's rather benign jobs report was the hidden numbers of significant losses of jobs in the construction industry in many states."

 

http://www.gold-eagle.com/editorials_04/mauldin072704.html

 

Didn't see that one reported on Crapvision, now did we ! :P

 

:rolleyes:

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