What To Do With 25k?

[Goldmember]

Those futures contracts: Excellent idea in general but you re forgetting that there is a lot of margin in those contracts. Each contract controls 100 ounces of gold for $1500 or so, which could easily generate a margin call if the POG in the futures pit dips only slightly. Cash reserves on those positions would be required to not get margin called away. Options on futures you can stay underwater without your borker margin calling away your money.

 

Don't get me wrong, I love the futures contracts idea, just leave yourself a "safety margin" the pit boys can't take a run at. For each $1500 contract leave yourself a minimum of at least triple the $1500 up front for each contract. At least initially until contracts are well in the money. So, with $25,000 buy only five contracts initially and use the balance to fend off the futures pit sharks. Once well ahead of the pond scum in the pits then you can free up your "safety margin" money for other purposes.

[sniff]

I do not consider writing covered calls on blue chips high risk. Unless one thinks this market is going to the moon. And then the only loss is the potential that one would lose on a strong rally.

 

It seems many here think the word Option equals high risk. Not so.

With writing (selling) covered calls, you actually take the money up front... when you write them.... It is not a get rich quick scheme. It is the only option stradegy allowed in 99% of IRA plans...And like any investment some knowledge and education is required.

 

I know Doc has some pretty good books in his bookstore on this subject...... get educated

 

I have & like BEARX, I scale in and out of it....most around here can read a chart,... channel high channel low.... 3 or 4 trades a year.

[Guest]

I must agree with PigeonDrop - almost all the proposals are extremely risky and are very likely to result in the loss of a substantial part (or even all) of the money.

 

It is not possible to answer the original question without knowing some other parameters - like how important this amount of money is (is it a playmoney? Is it something you depend on?), what is the person's risk tolerance, trading options, time horizont, etc.

 

Investing in BEARX does make sense - because this fund is short the broad market and long golds - which is exactly the "most successful strategy" Thor was talking about in the gold forum. Although BEARX is showing a nasty H&S Top pattern; it might be wise to wait and see whether the neckline will hold first. Another alternative is investing at least part of the money (5-10%) in physical gold and silver (equal dollar amounts), and another (larger - 20-30%) part in stocks of unhedged gold miners (no more than 5-8% of these 20-30% in a single stock); preferably ones that pay dividents.

 

Playing the leveraged funds like RYVNX risky unless you're a short-term trader (and an excellent market timer!) - and even then, it would be better to invest the money with Rydex directly, in order to avoid the commissions - but their minimum is too high for just $25K, unless you invest all of it, which is way too risky.

 

Betting the money on options of gold futures is a gamble, pure and simple. Don't do it, unless losing all of it is of no importance to you.

 

Regards,

Vesselin

[Pigeon Drop]

Wow, buying a deep out of the money option which will erode to zero over time UNLESS POG moves up drastically. A long shot bet with high payoff and little chance of paying off. If POG stays around the same, in fact if it doesn't exceed $420, the option will expire worthless. And in fact because it is so thinly traded if you change your mind and want out of the trade, plan on losing at least 15% of your principal to the bid/ask spread charged by the local making the market in the thing.

 

Vegas would be better. Or spend it all on something that will last. If you really have the urge to do the option, go instead to a local chapter of Gamblers Anonymous which deals exclusively with options and futures related addictions. Go get a cup of coffee and sit there and listen to all the folks stand up and say Hi, my name is John, and I'm a compulsive gambler. They can tell you how their lives were improved by their involvement with the high risk stuff. The stories will curl your hair.

[Pigeon Drop]

I do not consider writing covered calls on blue chips high risk. Unless one thinks this market is going to the moon. And then the only loss is the potential that one would lose on a strong rally.

 

It seems many here think the word Option equals high risk. Not so.

With writing (selling) covered calls, you actually take the money up front... when you write them.... It is not a get rich quick scheme. It is the only option stradegy allowed in 99% of IRA plans...And like any investment some knowledge and education is required.

 

I know Doc has some pretty good books in his bookstore on this subject...... get educated

 

I have & like BEARX, I scale in and out of it....most around here can read a chart,... channel high channel low.... 3 or 4 trades a year.

Buying a stock, then immediately writing a call == writing a naked put. The risk/reward are exactly the same, except you generate more commissions putting on and unwinding the buy/write so the brokers love it.

 

All you are doing is getting a little income, in exchange for giving away your upside potential in the stock. The downside is still 100% yours if the stock craters. We pick stocks to be long because we hope to find 10 baggers, we hope that for all of them but that is impossible. We know we will have many dogs. If we write covered calls on all the stocks in our portfolio (we should do them all since we cannot know which are dogs in advance or we wouldn't have bought them in the first place), we guarantee that the 10 baggers will all be taken away from us with a small gain in our pocket, and we guarantee that the ones that crater we will keep. This is why mutual funds that use options to hedge actively UNDERPERFORM over the long term those that are simply always long and not actively managed. The added costs of the hedging can't be overcome, over the long term.

 

If you want income buy bonds. If you want to take risk in long equities, then do it raw and be prepared to take your losses when you're wrong and make the high multiples when you're right. Doing covered call writing is trying to mix the two, with the outcome that your equities underperform to give you a little extra income.

[Old Habits]

How about dividend paying utilites? Either that or go to Vegas like Pigeon says and have fun. You've seen how successful all the forcasters are.

[Pigeon Drop]

Compulsive gamblers have different appetites when it comes to investments. Some like the

riskier action that the commodities and option index allows. Others think of themselves as

cautious long term investors preferring the blue chip varieties. But even the seemingly

ultrasafe blue chips dropped in value as much as riskier type stocks during Black Monday.

Both types of gamblers enjoy the anticipation of following the daily activity surrounding

these investments. Newspapers, hourly radio and TV reports and hundreds of periodicals

and magazines add excitement in seeking the investment edge. "Action is their game."

Investment goals are unclear, they are in it for the feeling it gives them as they experience

the highs and lows and struggles surrounding the play. When this activity starts to affect

relationships with spouse, family for employer or causes financial problems, they have

subtly crossed over the line from "investing" to gambling."

 

http://www.800gambler.org/stmgamb.htm

[DogBoy]

Goldmember, there are no margin calls on options. In fact you don't even need a margin enabled acct to buy puts or calls.

 

And as for the risk given the shape of the Bull market in Gold it is quite minimal.

 

If you don't think that Gold will go to at least $435/oz (break even) in the next 2 years then you just don't believe in the Gold bull and this trade is not for you.

 

You either believe or you don't. And if you don't believe in a trade then don't make it.

 

There is always a leap of faith early in Bull markets like this. It was the same with the Naz. In OCT 98 most people ran in fear of losing their money only to miss that spectacular blow off top.

 

I believe that CALLS on bullion will yield similar results to calls on NDX bought in 1999. That is vast riches.

 

As for how much you can lose the answer is $22500.

 

If that is too much for you then only bet $5000 or whatever you think you can afford.

 

In actuality if Gold stayed at the current price level for the next year your option would stil be worth about 700-800 dollars and you could bail out half way and get 11,250 back.

 

You can sell Comex options ANY TIME you want to with a few mouse clicks.

 

As for myself you couldn't even pry those options from my COLD DEAD HANDS.

 

If you don't believe Gold is in a Bull market then just put your money in Real Estate or the S&P which are absolutely not in a bull market.

 

It all comes down to how you view the future given that major top hat occured in the markets in MAR 00.

 

If you think things are going to go higher from here then Gold will undoubtedly sink as Prechter suggests.

 

But to believe that (especially after reading the great material on the Stool site) would truly be a huge leap of faith.

 

To my way of thinking it takes a much greater leap of faith to believe Gold will stay where it is or go down than to believe it will go up.

 

Long term secular trends don't just whip around on a dime and reverse. That's what makes them such great trades.

 

I hope DOC keeps this post in the archive so I can bring it back a year from know and see how the GREAT DoBoy get rich quick scheme is working out.

 

I'm willing to bet Da Dog will be absolutely correct.

 

And if you want to bet against Da Dog then I'd suggest following my example and putting your money where your mouth is.

 

Open a futures acct and buy DEC 04 PUTz on Gold. It's a truly suicidal trade but like Clint Eastwood said " well do ya feel lucky, go ahead and make my day".

 

And what a BEAUTIFUL Dog Day it will be !!!

 

Let's see who comes out better a year from now.

[DogBoy]

I got an idea.

 

I'll challenge ANYONE here to open a futures acct and write 10 DEC 04 420 Calls.

 

We'll arrange a day and time to make the trade.

 

Since Comex Gold options are so thinly traded we can "order match" quite easily.

 

You write the calls and DogBoy will buy 'em.

 

God help you if you don't have the bullion to back up the trade. In that case I hope you live in Florida or Texas so you'll at least still have a roof over your head.

 

Causes the losses on writing Calls in a Bull market are UNLIMITED !!!!

 

Oh, and there's one little rule:

 

Neither you or I can sell/cover until this date in 2004, that is 1-6-04 or whatever day the trades are completed on.

 

And no stops orders either. You just keep getting kicked in the Ass all year long but since you're so cock sure you'll be like a Timex watch and "take yo licking and keep on tickin".

 

If anyone knows that guy Prechter please pass this challenge on to him.

 

Put up or shut up !!!!

[MaxxPain]

You probably already have some physical gold. If not that would be my advice. $25000 in gold bullion.

 

Gold stocks would be my next choice. There just isn't any good place to park money in my opinion other than gold.

[Guest yobob1]

I would buy the Prudent Bear Fund direct from Tice. (order a prospectus online at Prudent Bear) Take the reinvest income and distribution option, and your share count grows over time. As to risk, it depends on your market views, but I consider this fund a low risk/high reward option. Same with physical gold/silver..low risk/high reward potential with current prices. Just takes some patience and the ability not to panic every time the charts twitch.

[Guest AssMaster]

Or you could assemble a doomsday "portfolio":

 

Kalishnikov AK-47 - $2500 (???)

60 ounces of gold - $21000

500 Cases of SPAM - $1000

1978 Ford Ranger Pickup - $500

 

Now that's a safe investment.

[phatbubble]

lOU, i trust you got enough ideas. best wishes.

 

pigeon, i'm see a few things i'd respectfully like to address.

 

Don't kid yourself into thinking that Vegas is gambling but speculating in options or metal futures isn't. ?I believe your odds of a win are better in Vegas, because the house edge is lower. ?Play craps, always bet come or don't come, and take max odds.

 

craps don't offer the best casino odds, blackjack does, and blackjack is the only casino game where the odds can be adjusted to favor a player (through card counting and a strict betting system).

 

Better: spend it all on something tangible you want. Remodel your kitchen or get a new bathroom.

 

a massive real estate bubble is currently in the early stages of deflating. home improvement, in many cases, is a worse investment than craps or blackjack. if the idea is quality of life, well, shit, then do it, or buy a boat, or throw a massive bash. but i'm pretty sure that's not why lOU started this topic.

 

 

Wow, buying a deep out of the money option which will erode to zero over time UNLESS POG moves up drastically. A long shot bet with high payoff and little chance of paying off. If POG stays around the same, in fact if it doesn't exceed $420, the option will expire worthless.

 

no drastic move is required, especially with expiry almost two years away. the option can go up dramatically without the POG going anywhere near the strike price. in any event, common sense dictates selling or rolling forward before time decay becomes severe.

 

 

Buying a stock, then immediately writing a call == writing a naked put

 

no, it doesn't, and i'd like to strongly warn anyone away from thinking that it does.

 

if you write a covered call, the worst that happens is the stock drops - you keep the premium, lose some stock equity, and pay commissions, and if you want to do it all again after expiry and keep collecting premiums, you can. this is the lowest risk option strategy, and that's why it's permitted in IRAs.

 

if you write a naked put, and the stock drops, your ass is in the wind. in 1987 some veteran decamillionaire traders were wiped out in one trading day when they got caught in this position.

 

just....for the record.

[Pigeon Drop]

craps don't offer the best casino odds, blackjack does

 

For a non card counter who cannot vary his bets, even playing a perfect basic strategy, blackjack has a 1.5% house edge. This also applies to a game where the deck is shuffled after each hand even if bets are varied. Only for a skilled player, who counts cards and makes no mistakes, and varies his bets, can the house edge go negative. That is of course only until the casino notices your bet variations (counting cards does absolutely no good unless you can vary bets) and bars you. I speak as someone who has over 10 years been barred about 5 times. For the person who isn't highly trained in blackjack, craps is the lowest house edge in the casino

 

no drastic move is required, especially with expiry almost two years away. the option can go up dramatically without the POG going anywhere near the strike price

 

Well certainly if POG goes up, the out of the money option will move in price. It would probably have to move several dollars up just in order for one to be able to get out the money he put into it, due to the huge bid/ask spread which goes with a thinly traded option, and the commission. You are trading with the specialist since there are no other bids/asks out there. Bid/ask spread could be 5% or more. You are making a leveraged bet on POG. You are paying dearly to make this. If you look at the premium you pay as the interest on borrowing enough money required to buy the asset you are optioning (the future) directly, for 2 years, you will find you are paying an extreme rate of interest for this leverage.

 

Buying a stock, then immediately writing a call == writing a naked put

 

Actually this is on the certification test for becoming an ROP (Registered Options Principal), the licensing exam for a brokerage compliance manager to be able to approve clients for option trading. Most people have no clue what they are doing in options. They say things like "but I own the stock so my risk isn't the same". That's because it takes some thought and analysis to realize this is the same. Let's go through it.

 

XYZ trades at $100. The $110 call trades at $10 (out of the money, $10 is all time value). The $110 put trades at $20 (it is $10 in the money plus has $10 of time value).

 

Gambler #1 buys 100 shares of stock, and writes 1 call. He pays 2 commissions. His net out of pocket cost is $9000, neglecting commissions.

 

If the stock moves down to $70 at expiration, he has lost $2000.

If the stock closes at $0 he has lost $9000.

If the stock closes at $100 he has made $1000.

If the stock closes at $110 or higher he has made $2000.

 

Now let's look at Gambler #2, who writes 1 put naked, collecting $2000 of premium.

 

If the stock moves to $70 at expiration and he is assigned, he ends up owning the stock worth $7000 which he pays $11000 to buy, but he collected $2000 for writing the option to start. His loss is $7k-11k+2k=$2000. Same as G#1

If the stock closes at $0 he is assigned stock worth $0, he pays $11000 for it, and collected $2000 premium at the start, his net loss is $9000. Same as G#1

If the stock closes at $100 he is assigned stock worth $10000, pays $11000 for it, got $2000 at the start, and has made $1000, same as G#1.

If the stock closes at $110 or higher, he is not assigned, he collected $2000 for the option which expired worthless, and he made $2000, same as G#1.

 

Buying a stock and immediately writing a call has the exact same risk/reward as writing a naked put, with the same strike as the call, if the pricing of the put and call are in normal Black Scholes alignment, which is what the market makers use to determine the value. There IS a slight discrepancy due to the "cost to carry", but that is made up by the interest earned by the writer on the in the money premium held for the term. (In my example, say the in the money put trades at $19.50 while the call trades at $10.00. The slight difference is due to the incremental interest the writer can collect on the extra $9.50 held for the entire term when writing an in the money option. It all comes out equivalent in the end. The difference in pricing is keyed to the risk free rate of interest which goes into the pricing model.)

 

After writing the naked put you can cover it, roll it up or down, or take the assignment if you like. You have all the same choices you have with a covered call. Of course most retail brokers do not allow writing naked puts in IRAs, this is a restriction on the IRA account to protect them from lawsuits from gamblers who lose their retirement funds then sue saying they had no idea what they were doing and should be reimbursed. Institutional accounts and non retirement accounts don't have any restriction. I believe there is at least one brokerage which allows writing a naked put in an IRA.

 

Brokers love covered calls because of all the commissions generated by repeated activity required to maintain the position.

 

Oh, and by the way. Shorting a stock and immediately writing a covered put==writing a naked call with the same strike. Do the math, the risk/reward is exactly the same. And yes, when you are short and write a put, the put is "covered" by the short. Both strategies have equivalent unlimited risk if the stock moves sharply up.

 

just...for the record

[phatbubble]

pigeon, great articulate summary. i guess it's all about assumptions. mine were 1) that one would unquestionably avoid playing blackjack with restrictive min/max bet limits at all costs; and 2) that not everyone understands that Wild Bill "Putwritin'" Hickok may have to step up and fund the assignment (hence my noise about risk).

 

re 'trading with the specialist'....i had a recent conversation about this very thing with an old acquaintance, who it turns out is now the pricing guy for a fledgling derivatives arm of a large european firm. apparently they swear up & down to potential investors that the prices are spat out of a computer....and it's just him, noodling the levers behind the curtain like the wizard of oz.

 

btw, if you've been barred 5 times then you must have made some good coin. good for you.