The implication that what I have said has nothing to do with Choice members is insulting. That members have no interest in learning about different approaches to unearned income; about demystifying myths about some approaches; using phrases like:
I feel confident that most readers of posts in this Community, or articles in Choice, would be interested in how to invest their money with a good return and minimum risk.
Infer that Options contracts are ‘risky’. Which is risky:
To buy 100 Commonwealth bank shares at $98.51= $9851
or to buy a Call option contract to buy 100 CBA shares for $250
The former the future is very uncertain, it is hence risky; the latter the worst that can happen is you lose $250. In both cases if the share price rises both increase in value, and probably the Option more so.
This thread sought input about CFDs. I added my experience with CMC, while seeking Option investment. As my experience has shown many poorly informed lump Options into the same basket as CFDs, I thought it pertinent to explain the facts in plain english, to help distinguish the two.
As far as I am aware there are two definitions of Investment.
One regards increasing the investors unearned income, eg, by capital growth of assets or by yield.
The other is its use in economics, which regards the application of funds to increase the means of production, usually buying equipment to replace labour.
The former use words like Trader and Investor, as subjective terms regarding the activity/passivity of the Investor/Trader but there is no difference in their objective, ie, unearned income. Some favour capital growth, eg, buying shares low and selling them high, others rely on the twice yearly yield, with obvious mixtures of the two components. CFDs, Shares, Options, etc, are all mechanism using ASX type markets.
Investing is a form of gambling, like all its forms it is about ‘chance’! Chance of a future scenario playing out. Probably the only Investment strategy that minimises the chance aspect is fixed interest rate.
Share investors use Fundamental and Technical analysis, to help them reduce the chance element, but their success rate is dubious.
Options use probability theory, that share volatility in the long term is bounded by the normal distribution curve, the classic bell curve, hence 1 standard deviation provides a 68% chance of success.
Investors are kidding themselves if they believe Investing isn’t gambling. The differentiating factor, is the people, there are those that both understand the risks of their strategy, and actually apply the mitigation strategies. Even the most knowledgeable, often don’t action their ‘Stop Loss’ triggers.
Could you explain how that gives you an advantage? Why does it give you an advantage and not other players?
If there is no advantage why do it? If it is available to all how is it an advantage to you?
That needs more clarification. I understand the bit about one SD either side of the mean describing 68% of the area under the normal curve but I don’t see how that knowledge gives you any benefit in this case.
I’m not an expert, rather learning about them and doing paper trading. So my understanding to date is: in Options, you want the share price to move in the direction you predict, which can be up or down and for more complex trades sideways. Knowing the volatility range and the size of its typical price movement gives you valuable information about how likely a specific share is likely to move in price. As a taker (buyer) you want to open a contract when volatility is relatively low, and Options are cheap, but you predict will become increasingly volatile over time within the 1 SD, ie, are hence more likely to move into your predicted profit zone. The objective being to close the position as its volatility increases towards your prediction, ie, within the expected range. Some shares have a very clear direction, Eg Star (SGR) are on an obvious long term downward trend, the price range is very narrow, an experienced Option investor will make a profit from this downward movement, knowing that it will in all probability bounce up and down within 1SD 68% of the time.
To some degree, within a limited time-frame, except when ‘black swan’ events happen.
But how do you know which shares will increase in volatility? Can you get a profit predicting just that or do you have to also have a movement in the direction that you predicted? How do you pick that?
On the one hand you are assuming past stability predicts future stability but then you are saying the reverse, that it will start to move, hopefully the way you want.
How do you make a profit by it bouncing up and down?
Regardless of the details above how do you beat the mob, why don’t they do as you do? This is a zero-sum game, gains by some have to paid by losses from others. If everybody uses your system then who pays the losses?
You are asking a lot of questions but not giving anything back. Nevertheless I’ll endeavour as someone learning, to answer your many questions.
Whatever approach you take to investing in the Share market, you are faced with same imperfect situation. At some stage all shares move in a specific direction, ie, a trend. That may be up/down/sideways. That doesn’t mean they move that way every minute, hour, day, its a trend, not an absolute. Given that trend, the prices still rise and fall constantly. That rise and fall tends to follow a pattern, not a perfect pattern, but statistically significant, ie, its volatility range. So, if the trend is down eg, SGR, it bobs up and down, but over say every few days it cumulatively is lower.Statistically the pattern for shares follows the Normal distribution, ie, the Bell curve. One SD statistically is 68%, ie, 34% either side of the mean. As you say, outside that 1SD black swan events do occur, but statistically less often.
The markets, eg, ASX, provide data about historical Volatility. Humans use history in every manner of life, as one of the best predictors of the future. Your family no doubt will return tonight after work/school as they have in the past. In addition to that for Options, more complex maths is used to compare daily price movements with the historical trends to infer tomorrows likely movement, referred to as Implied Volatility (IV).
IV is used by the market makers to guide their pricing of Options. Market makers are like Insurance companies, they make money from very small gains from many thousands of small deals from individual investors, that they calculate will make them profitable over the long term. Their objective being that more will pay them premium than those who exercise their option at a favourable price.
This is my current understanding for what it is worth.
I think I answered all your questions, by explanation. You seem to be very angry at me for sharing my learning to date. You haven’t shown any appreciation of me doing my best to explain complex topics.Your questions seek Absolutes, and I have said there aren’t any, it is about statistical probability. Trying to improve ones ‘chance’ of success vs chance of failure. 1SD gives you a 68% chance of success vs 32% chance of failure. About 2:1 chance.
I haven’t said anything about big players. There are ASX registered Market Makers who have an explicit role regarding the supply and pricing of Options, which i have said are like Insurance Companies. We all buy insurance, 000s of small clients, each paying a relatively small fee to insure against a large loss. Options Takers (buyer of Calls and Put) are just like the insurance clients, each opening a relatively small Option contract with the objective of making a better return in a fluctuating share market. No attempt to emulate MM, they have a role.
If the Normal distribution is incorrect for Volatility, then put me right, supply your references to other statistical patterns that are more accurate. Statistics is only about the generality, obviously there are specific that don’t follow the pattern in every use of statistic known to man. Using 1 SD says that exactly, ie, that 32% are outside that probability range. Engineers would never design a critical structure to just a single SD. But, using 1SD seems far better than none, typical of Share traders.
Monitoring Volatility statistically improves you chance of success, that’s all, I haven’t said or even implied any guarantee of making money.
Using statistical probability is different to Share traders, which seem to use only Fundamentals and Technical Analysis; essentially no statistical relevance at all, just historical opinion and shapes.
And right there is the difference between gambling using probabilities, and shrewd investing. But the playing field is not level. The professionals have insider knowledge that amateurs do not, and they have trading tools that can act in a blink of an eye. By the time an amateur becomes aware of a buy or sell event, it is all over. You lose. And they win mostly.
There are trader tools that are somewhat beyond awesome if one pays enough or has a large enough portfolio to be a ‘special client’. They can automatically trigger on almost anything from volume to price changes to stop loses and combinations thereof. A punter might not beat the market maker but won’t be too far behind if they use the full features of one.
They win a lot and the punter wins a bit. A different outcome to ‘you win some and lose more’
We long term types often live on dividend cash flow rather than capital gains so short term market fluctuations are not nearly as interesting to our wellbeing as reliable dividends, another aspect of ‘investing’.
It should be possible to get answers to questions about how you make your decisions and why you can do it that way and get a better result than the mob. But I now have the three times reply warning so I pass.
It’s one approach. In your example referring to placing a bet on the market through Options Trading as opposed to betting on CFD’s.
Is the underlying assumption shares and other traded financial products are statistically predictable based on past pricing?
My lay understanding is the markets price all according to measured risk. The more certainty the less the risk and the less the volatility. Even odds on favourites fail regularly at “The Cup”.
Versus placing a bet on a specific Share rising! Share trading/investment is as much about gambling. What does Shrewd investing imply, if not gambling?
You copied the Risk from Comsec but excluded the Benefits below. Note in the risks you’ll see the repeated references to ‘Selling’, ie, being the Writer of a contract carries the obligations and hence the risk and need for Margin Loan. I Pointed this out from the outset.
Unlike share trading you’ll note from the Benefits that option outlay is much less than share trading, and the risk is also known in advance. Further the opportunity to benefit when shares fall in value. Short Selling shares for the retail investor all but impossible.
Benefits
Generate income
If you’re expecting the price of a share you own to remain flat or fall slightly, you can earn extra income by writing Call Options and receiving the premium upfront.
Protect your portfolio
Protect your shares against a fall by buying a Put Option that locks in the shares’ sale price for the life of the option. If the share price rises, your gain is reduced only by the premium paid.
Trade your perspective
Options are a flexible tool that you can use with a range of strategies in all market conditions (rising, falling, flat). You can trade them over the time horizon that best suits your view.
Small initial outlay
With Options, you can potentially make higher returns from a smaller initial outlay than investing directly. You may benefit from changes in share price without paying the full price of the share.
Diversify your portfolio
With a smaller initial outlay, you can have a more diversified portfolio than if you bought shares directly. You can also use Options over an index to trade your view on the general market direction.
Time to decide
A Call Option gives you time to decide on buying shares. Once you pay the premium (a fraction of the share price) and lock in a buying price, you can buy the shares any time before the option expires.1
I too shared your cynicism regarding Options. But instead of dismissing it, I decided to explore it. Over the last year I have done a lot of freely available online learning. Much of it I have had to repeat several times because the jargon is often confusing, the concepts seem counter intuitive, and myths about huge loss. Also some of the free education is linked to dubious people who just want to ensnare you in their paid systems, under the premise of guaranteed gains.
There are tools out there.
Incredible Charts is an Australian tool suitable for Share but not Options Trading. I think it has a free version. For $200pa you get data with a 20min delay, and I think you can get real time for increased cost. Most realtime data is quite expensive. It has very good explanation and examples of technical analysis tools.The charting is good, and the filtering tools are some of the easiest to use.
At the other extreme of complexity you can get a free demo a/c, using 20minute delayed data, but covering the globe, from Interactive Broker a USA company, that is extremely thorough, and suitable for all types of trading. I’ve only touched the tip of the iceburg of its features and facilities.
One of the best free education sources for Options is The Options Industry Council theocc.com from the USA. It really is a huge education source, with fantastic video, hundreds of hours of it from beginner to expert.
Yes, and I provided the link for those interested in looking further. There is money at risk whether one is a Buyer of Call/Put Options or a Seller of Call/Put Options. There’s more than enough discussion in the prior posts for those not confused by the terminology, methodology and strategies to form their own opinions on whether there are any benefits.
Investing directly in shares or a business is a risk. However we need many different businesses to meet our everyday needs. Capital applied wisely can benefit all.
The idea that one can make money simply by outwitting someone else who has placed their money on an alternate outcome will challenge many as to whether it should be allowed.
I had not intended to express cynicism about options. Well played options can be profitable and as you wrote, the risk is easily quantifiable. OTOH blindly getting into options without understanding what the specific underlying share might do is not for the novice.
A family member traded options for years making a few $100s each time and only had to sell his shares once; he understood how to value the strike.
The risk for Takers, ie, Buyers is limited to the upfront premium, for both Calls and Puts. It is that clear, that simple. If you as the buyer you chose to exercise the Call or Put then there is a financial outcome, but it isn’t a risk, its a choice.
There is nothing in Options about outwitting others, that is BS, it really is. I don’t think it has any place in this forum.
Options are not outwitting, they are ‘gambling’ on whether a share price will rise or fall as well as by how much. Those successful with options make informed educated guesses, again, not a low risk product for the novice.
In a way it is a variation on a limit buy and sell on the same parcel of shares. Instead of putting the full value in play only a fraction is required unless there is a strike. No strike and a few dollars can be made on the expired option.
