Musings 6/27/07
Our thoughts on interesting observations, where we cannot do a full analysis.
Great call by Scott Rothbort. His volatility spike observation last night gave his readers a good entry point for the market. If you do not have his blog on your RSS reader (as we do) it is time to add it.
Roger Nussbaum highlights a new CBOE benchmark, probably leading to a tradable index. Selling naked puts was a factor in the 1987 crash, as I wrote on RealMoney (subscription required and worth it for active traders) today. There is a good return if the trade is done in appropriate size, but those doing the trade–institutions, market makers, and even individual investors– got very overconfident in 1987. Non-professionals should be very careful in determining appropriate size on this one. More on this topic at CXO Advisory.
Muckdog captures the Fed preview in his typical fashion. Since he objects to "level headed" we shall just say it always seems to reflect what an intelligent observer might parse from a lot of information. His presentation is stylishly superior to ours (sometimes criticized as pedantic) and includes useful search optimization terms that we lack. Check out his post to verify his superior presentation.
Dr. Brett looks at the problem of "chasing" stocks that you like, where you missed the entry. We suspect that many face this problem right now, and he provides some useful guidelines. We have discussed this in the past with some stocks that make gap moves after decline, especially Apple Computer, Inc. (AAPL).
Meanwhile, we all await what the Fed says about inflation and the economy.
You mean, what the Fed says about the Price Indices and GDP, right?
LOL, thanks for the comments and kind words. Fed announcement and the NBA draft, all in one day. Sounds like a good day to bring home a keg and call out for pizza delivery.
Jeff, if can post a question that perhaps you could answer at your blog? At RM recently, you wrote,
“In our fund, we maintain a deep call position in Transocean, rolling up or down as the stock moves. This method generates a higher return than buy-and-hold, and it does so with less risk.”
I think I understand how you do this, but am wondering how you avoid getting eaten up by the vig? Also, do you maintain a constant delta?
Thanks, David
David
We generally take starting positions with a delta of 80-85, little premium over parity, and relatively narrow spreads. We are sometimes able to split the market. Our commission rates are good. We can be fussy about initiating new positions.
A sharp stock decline drops the deltas to the 50-55 level and premium increases. We then roll to a lower strike, add dollars, and get back to 85 deltas. The timing of this and choice of month and strike is where we use our expertise in options trading. We also do it in the cotext of our overall position.
If the stock rallies and gets to 95+ deltas, we follow the reverse procedure.
The method also enforces the kind of portfolio balancing discipline you advocate in your writing. We are buying on dips and trimming on gains, locking in profit.
Meanwhile, the overall position risk is much less than owning the equivalent amount of stock.
Thanks for the question.
Jeff