NCP out of the money Options.

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spider

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Post Number: 576
Registered: 10-2002

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Sunday, May 04, 2003 - 10:32 pm:

Spider is not a BIG option person, but occasionally he sticks one leg in.
In the past I have had some good runs, but they seem to be at times that the trend is obvious for that share, then I get bigheaded and get my butt kicked!

The increased pressure associated with options tends to wear me down. So, in short, I admire you dudes who trade options on a regular basis, and I would like to pick your brains..............................

I have been developing a theory associated with very volatile shares, and NCP came to mind.

To put it simply, it involves taking out of the money (way out of the money) options, on a regular basis, both short and long, to take advantage of sudden rises, or falls in the stock, which seem to happen often.

*First question........ do you see any value in such a strategy?

*Second question............. are there any other shares that fit into this VOLATILE category?

All comment are welcome.
spider.

bundy

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Post Number: 42
Registered: 03-2003

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Monday, May 05, 2003 - 12:53 am:

spider,

May I humbly suggest you go back to the drawing board.

Straddles/strangles are generally not a profitable strategy to employ in the Australian options market.

Having said that - the high liquidity in NCP makes them more a more likely prospect - but I am still doubtful.

Secondly, buying way out of the money contracts is a very aggressive strategy.

Sure - it sounds conservative and cheap - but therein does lie the trap for novice option traders.

Because you are so far out of the money - the deterioration of the unprofitable leg will probably exceed any gain you make on the profitable leg.

Also, you have to take into account with wild swings - the losing leg could well be the winning leg the next day or so - so if you sell it immediately, you have closed a potentially losing position.

Even if you are right - volatility could decline significantly and the gains on the winning leg could be quite meagre.

Also, trading high volatility stock is - by definition - very risky.

The only way I could see this strategy working is if you held for a very short time - say overnight - and then I have my doubts.

There is a way to trade NCP - when it is cycling and using Stochastics to time you entry - but at the moment - NCP is bouncing around like a lost boat in a squall.

Just my humble opinion - I would love to be proved wrong and make some money on this beast.

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Bundy

spider

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Monday, May 05, 2003 - 02:09 pm:

Yo bundy,
thank you for taking the time to post an answer.
I cannot take up your challenge as I have never traded NCP up until now.

I always considered it the hight of insanity to trade this stock as it was violently influenced by so many arbitrary factor. (Any share that jumps just because the boss makes a speech, seemed like like a dangerous trade to me!)

So don't get me wrong, I'm not exactly 'trading' this share as much as I am trying to cash in on it's unpredictability.

This is a strategy that may take six months to a year to show a profit, but when it does it should be a substantial profit.

What I am searching for here is the random event that moves NCP far enough and fast enough to make either my call or put leg pay off.

I admit that this is not a new idea. But I believe that not too many have put this particular idea into practice as it goes against the grain.

I will be happy to share my results with you, if you don't get bored with me along the way, as this could take a while to disprove ( I don't believe that you can absolutely prove a theory, but in this case you can disprove it with a long series of losses. Unfortunately a string of up to eleven losses in a row is not outside the norm, so we are going to have to wait a while for some sort of answer).

To stop myself from falling asleep, I have put real money into this trading experiment, as I don't believe it works unless there is money on the line.

Captain, you said.................
"Each way greed leads to a false sense of security and heaps of brokerage fees and most lose
And so they should
They had no conviction and part of them won
Sometimes we all like to be a winner even if we have to bury the past at times".

You miss the point, this is not about greed, it's about maths. It's about harnessing random events. What would the payoff for this strategy have been on September 11?
Also there is conviction on my part, it's my money on the line!

You can work your butt off as a trader for years, and be blown out by one random event. (IF you made a bundle in the 80s, you could have lost the lot and more in '87).

"87, Mexican peso, Russian bonds, Asian currency crisis, '94, the tech bubble, Japanese stock bubble, interest rate moves, Argentina, Gulf war one and two, and these are just off the top of my head.

Jesse Livermore is the only trader I have come across that was consistently on the right side of these situations, and made many millions in the process, the rest of us get caught by just one of them and it wipes out all our hard work.

I would like to find a way to capitalise on the one thing that we all fear, random events.

My strategy is extremely primitive at the moment, but I am working on it.

My challenge to you guys, is to test my logic.
All opinions welcome.
spider.

P.S. Bundy,

you make a good point when you say...........
"Also, you have to take into account with wild swings - the losing leg could well be the winning leg the next day or so - so if you sell it immediately, you have closed a potentially losing position."

But what if my strategy is dependent on the winning leg being big enough to cover both sides, that is I don't sell the losing leg, I let it run?

spider

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Tuesday, May 06, 2003 - 02:06 pm:

spider has done a little more homework.

NCp's volatile history goes back almost exactly 6 years.

In that time there have been 19 months where the price has moved $2.20 or more in the month.

There has been 7 months where the price moved $3.35 or more in the month, including one month where it moved $4.35 (no prizes for guessing which month that was!)

The interesting part of all this is, did the price move all in one direction, or a bit each way?

Well there were 3 spinning tops (each way) 1 shooting star (up then down again) and 1 where it went all the way up then down again. These last two fit into what you were saying 'bundy'.

So there were two situations where I would have made money on both legs, and 17 occasions where I would have lost all the money on one leg.

There are lots of other things to consider here, but I thought you might find this bit interesting.
spider.

bundy

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Post Number: 43
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Tuesday, May 06, 2003 - 02:16 pm:

Spider,

I'm hoping NCP will throw up better opportunities in day trading.

I have today started trading with DFF.

Shorted NCP twice so far for a modest gain and sold PBL short.

I think NCP will be another shorting opportunity after lunch. :-)

It's a bit more hectic than options - but I think I have too much on my plate - need to trim the watch list heaps to those stock with good volatility.

---
Bundy

couta

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Tuesday, May 06, 2003 - 07:11 pm:

hi spider & bundy,i have played the options market in aus for many years using many stratagies,and the only way i have made consantly good returns is trading the trend.the biggest factor to overcome in this game is time,time erosion makes or breaks a trade.i like ncp and there is mega bucks playing options on it,but i look very closely at the us charts .you want fast movers i suggest rio tinto (rio)i trade this stock every week or two.random? sorry i must disagree if the stock market was ramdom so would its patterns and you wouldnt be able to read it,just what i think.

spider

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Friday, May 09, 2003 - 01:43 pm:

Yo couta,
9/11, PPH, you don't consider these to be random events?

Even Daryl Guppy, in his weekly ramble on Sanford, considered PPH to be a random event, and goes on to attempt to prove it on a chart.

For the most part I agree with you (if I didn't I would not be a chartist).

I'm obviously asking this question VERY BADLY.
So I'll ask it again.

How do we take advantage of random events (such as the two listed above), so that they become opportunities rather than something that we have to guard against?

I have put forward a strategy with regard to NCP. This is an,as yet, untested strategy , but is an attempt to address the problem.

I realise that I have not explained myself very well, and I appreciate that so many of you have chimed in with suggestions and a concern for my trading wellbeing, and for that I thank you.

As most of you would know, I am positively evangelical about protecting your capital.

But I would like to take it one step further and profit from those things that we fear, random events, that take away our hard earned profits.

So I need you to expand your thinking, and, just for a moment, believe that it is possible to profit from random events.

How the hell do we achieve this goal????

spider.

.

"Normal is getting dressed in clothes that you buy for work, driving through traffic in a car that you are still paying for, in order to get to a job that you need so you can pay for the clothes, car and the house that you leave empty all day in order to afford to live in it."
- Unknown

couta

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Friday, May 09, 2003 - 10:01 pm:

Spider
The question is the time frame between random events and the amount of money it costs you waiting for those random events to occur. So yes I must agree - random events do occur but from my experience as a chartist the charts will normally tell me what a specific event will be (ie. an upcoming quarterly profit) or an event that hasnt yet been made public. So I suppose I trade these events and to be honest the more volatile the stock the better! Which is why I specialise in Rio. With volatility comes predictability. What goes up must come down. Sorry got sidetracked regarding 9/11, I am positive that the Elliot specialists had predicted a major down turn around that time, or was it Gann? The question has to be asked are random events random? But admittedly I have never researched such an expanded time frame because options for me requires a very short time frame.
I will think about random but as I said before it would come down to the amount of time between random events and the cost of having puts and calls on the market every day between these events. You also ask about taking advantage of the volatility of stocks such as ncp, are these two separate thoughts, random and volatility? How do you trade? Do you buy and sell stock only? If so Aust market only? or offshore as well?

PS I love the quote - it is so true to so many!

chance

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Saturday, May 10, 2003 - 05:24 pm:

Spider,
I have saved a brilliant article called, I think, "The Black Swan' by Malcolm Gladwell.
It's about how a Wall St. trader called Nassim Taleb, turned the inevitability of disaster into an investment strategy.
I wouldn't like to post it due to copyright,and unfortunately it was too large to send privately.
The article is about a book titled "Fooled by Randomness. The Hidden Role of Chance in the Markets and in Life" by Nassim Taleb.
I think it is very relevant to what you are proposing with way out of the money options.
Regards
Chance

couta

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Saturday, May 10, 2003 - 10:19 pm:

Well spider, I have had a chance to think. Is the best strategy not to be concerned with random events occurring but to make sure you trade them after they occur. For example after 9/11 we all knew the market was going to drop dramatically, so let it drop and at the first sign of the market reversing start taking your calls. If the market continues to drop buy more calls. Then sit back and capitalize on the rebound. These events provide the greatest movement of fear and greed, so what I am saying is trade the greed side only. That way your time is free to trade however you normally do, but if an extra ordinary event occurs you are ready to dump everything and capitalize, on what would be for most a losing situation. One point to make is that our banks are normally the first to recover NAB CBA etc in these extreme environments, so I would recommend these stocks for options not NCP.

chance

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Sunday, May 11, 2003 - 10:33 am:

Spider,
and anyone else interested in probabilities.

Nassim Talebs homepage is at...

http://pw1.netcom.com/~ntaleb/

There is a link there to the article by M. Gladwell written for The New Yorker.
It is a great but long read.

Chance

spider

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Sunday, May 11, 2003 - 11:40 am:

Funny you should mention that, dude.
I've been driving everybody crazy with this stuff because I just finished reading that book.
Whatever it takes........................... get a hold of a copy for yourself!
spider.

.

spider

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