Winning Options Trading System

Options Payday Alerts

Options are contracts which give the buyers the right, but not the obligation, to buy or sell a particular number of shares at an agreed time and date. The buying and selling of securities are done in the option markers, where trade contracts are based on securities as collateral. The Option Payday Alerts enables its users to receive weekly alerts on their emails or through the view alerts in the members' section. This product provides its users with the ability to trade for less than twenty minutes per week. Option payday alerts do not require any experience for ease of use as it is friendly for beginner and professional traders in the market. Consequently, the options payday alerts opens one new trade every week, collect money from the trade and wait for a few weeks until the option expires. It the option traded expires on the profit zone, there is a win, and if it does not, the position is adjusted until a success is achieved. The option payday alerts have an average trade holding period of two to three weeks, a strategy that yields consistent wins that multiply over time. Options payday alerts solve the biggest trading problems. More here...

Options Payday Alerts Summary


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The Currency Options Market

The currency options market shares its origins with the new markets in derivative products and was developed to cope with the rise in volatility in the financial markets worldwide. In the foreign exchange markets, the dramatic rise (1983 to 1985) and the subsequent fall (1985 to 1987) in the dollar caused major problems for central banks, corporate treasurers, and international investors alike. Windfall foreign exchange losses became enormous for the treasurer who failed to hedge, or who hedged too soon, or who borrowed money in the wrong currency. The investor in the international bond market soon discovered that the risk on their bond position could appear insignificant relative to their currency exposure. Therefore, currency options were developed, not as another interesting off-balance sheet trading vehicle but as an alternative risk management tool to the spot and forward foreign exchange markets. Therefore, they are a product of currency market volatility and owe their existence...

The first options markets

The Australian Options Market (now owned by the Australian Stock Exchange) opened in 1976. In 1978, the first traded options markets started trading in Europe. The European Options Exchange opened in Amsterdam followed soon after by the London Traded Option Market (now owned by the LIFFE). Other futures and options markets followed. The London International Financial Futures & Options Exchange opened for business in 1982, the Singapore International Monetary Exchange in 1984 and the Hong Kong Futures Exchange in 1985. Many new markets in the Americas, Europe and the Far East followed these during the late 1980s and the early 1990s. While trading in precious metals was up in the United States by 41.0 per cent to 13.9 million contracts in the first half, trading in these products outside the United States declined by 14.5 per cent to 19.4 million contracts. Gold futures at the New York Mercantile Exchange rose by 29.9 per cent to a total of 7.7 million contracts in the first half, while...

Dont Let Your Fear of Failure Stop You from Being a Profitable Option Investor

First off, all rational, reasonable, intelligent adults have an innate fear of failure. In fact, most Americans are continually warned from birth to be careful and watch out for the unforeseen. However, it is how human beings are able to overcome the very real fear of failure that determines whether an individual will eventually be successful in a given endeavor. I use my own fear of failure to keep me motivated when I am in the middle of a project. So, if fear of failure is what you feel is holding you back from becoming a profitable option investor, I have a possible solution that just might work. I am usually not a big fan of what I refer to as the rah, rah crowd so-called motivational speakers because I believe that lasting motivation is something that comes from within. However, I highly recommend that you listen to the following two audio programs by best-selling author Earl Nightingale The Strangest Secret in the World for Succeeding Today and Lead the Field, which are...

The Options Trading Crowd at Extremes

Equity-only put call ratios have the most intuitive appeal for sentiment technicians looking to keep a finger on the pulse of the nonprofessional crowd, the most likely traders to make common misjudgments among options traders as a group. If the equity-only options traders are in fact wrong when the group thinks alike at sentiment extremes, it should be easy to examine this options trading crowd behavior to see if it has any reliability and special patterns that would be useful for trading system development. In this chapter, therefore, I conduct a series of tests of the conventional equity-only put call ratio option volume data to determine if the options trading crowd is predictably wrong in its trading decisions near sentiment extremes. The tests show the degree to which this data series provides reliable information about the short- and medium-term direction of the S&P 500 following excessive bearish or bullish sentiment captured in put call ratio levels.

You Do Not Need a Big Checkbook to Become an Option Investor

Term FICO refers to the name of the company, Fair Isaac Corporation, that developed the popular credit scoring model named FICO, and a lifetime employment contract in order to become an option investor. The fact of the matter is that buyers of options usually face very little financial scrutiny. For example, when buying an option, you almost always avoid having to pass any of the financial tests income, debt, and credit scoring that are such an integral part of the buying process. This is mainly because many property owners involved in an option transaction seem to focus only on the amount of the option fee they will receive from the deal and pay scant attention to the party buying the option. The only financial test that most people must pass when buying a real estate option is having the cash necessary to pay the option consideration fee. The amount of money that you will need to do your first option deal depends on what segment of your local real estate market you target. For...

Why Option Investors Are Usually Buyers of Last Resort for Obsolescent Property

As I told you in Chapter 2, the most profitable type of properties to buy real estate options on are derelict-type properties that do not appeal to many prospective buyers. And they are also the easiest types of property to put under option because option investors are usually buyers of last resort for obsolescent properties. In other words, no one other than an option investor is willing to take a chance on these types of cast-off properties. And when you are the weary owner of a piece of property in less than pristine condition, which has been sitting vacant for a long time with no purchase offers in hand, you cannot be too choosy about how you sell your property. The fact of the matter is that option investors often provide the only hope that the owner of an obsolescent property has of ever selling his or her property. And this lack of demand can put option investors in the driver's seat when it comes to negotiating low-cost option fees and below-market purchase prices on...

Kurtosis In Return Distributions

Kurtosis is the statistical measure that tells us when a distribution is more or less peaked than a normal distribution. A distribution that is more peaked than normal is called leptokurtic (lepto from the Greek word for slender) a distribution that is less peaked than normal is called platykurtic (platy from the Greek word for broad) and a distribution identical to the normal distribution in this respect is called mesokurtic (meso from the Greek word for middle). The situation of more-frequent extremely large surprises that we described is one of leptokurtosis.44 44 Kurtosis has been described as an illness characterized by episodes of extremely rude behavior. The calculation for kurtosis involves finding the average of deviations from the mean raised to the fourth power and then standardizing that average by dividing by the standard deviation raised to the fourth power.45 For all normal distributions, kurtosis is equal to 3. Many statistical packages report estimates of excess...

Example 317 Calculating Sample Excess Kurtosis

Having concluded in Example 3-16 that the annual returns on T. Rowe Price Equity Income Fund were approximately symmetrically distributed during the 1993-2002 period, what can we say about the kurtosis of the fund's return distribution Table 3-28 (repeated below) recaps the annual returns for the fund. 1. Calculate the sample excess kurtosis of PRFDX showing two decimal places. Solution to 1. To calculate excess kurtosis, we find the sum of the deviations from the mean raised to the fourth power, divide by the standard deviation raised to the fourth power, and then multiply that result by n(n + l) (n - l)(n - 2)(n - 3) . This calculation determines kurtosis. Excess kurtosis is kurtosis minus 3(n - 1 )2 (n - 2)(n - 3) . Table 3-30 gives the calculations. TABLE 3-30 Calculating Kurtosis for PRFDX TABLE 3-30 Calculating Kurtosis for PRFDX Kurtosis 4.39 Excess Kurtosis 0.05 Solution to 2. The distribution of PRFDX's annual returns appears to be mesokurtic, based on a sample excess...

Why Trade Options

With the tremendous growth that has occurred in the option markets over the years, it should come as no surprise that options provide an excellent trading opportunity. As you have probably been able to gather thus far, buying options responsibly can provide a greater level of security to traders, allowing them to rest easy during the day and sleep better at night. Options give traders more time to think about their positions without worrying about how much they could potentially lose. As one family friend puts it, buying options enables the trader to leave the computer screen and hit golf balls. If traders were to take positions in the actual security, or sell options, they must closely monitor their positions and only watch others hit golf balls on ESPN.


A nonnormal distribution also might have more or fewer returns in the center of the distribution than the normal distribution. Kurtosis is the degree to which the histogram of a return series is more peaked or flatter than that described by the normal distribution. The degree of kurtosis can be calculated by Equation (9.10). Kurtosis To calculate kurtosis we EXHIBIT 9.14 Kurtosis Kurtosis The kurtosis for a perfectly normal return distribution is equal to 3. To simplify the interpretation of kurtosis, we sometimes report only the excess kurtosis, which is equal to the kurtosis minus three. Excess kurtosis Like skewness, the kurtosis has no meaning in terms of return it is just a measure of the shape of the return distribution. The return distribution given by our example has excess kurtosis of -1.04 for the fund and -1.59 for the benchmark. Exhibit 9.14 demonstrates the calculation of kurtosis. Positive excess kurtosis indicates a more peaked than normal, or leptokurtic, return...


I enjoyed Marc Allaire's article ( Rolling covered calls ) in the April issue of Futures and Options Trader. I've been doing this and find it works well for me in a select number of stocks. If the credit received from placing a collar trade (see The collar trade, Options Trader, March 2007) does not beat a risk-free rate of return, you could receive from a T-Bill or similar instrument, then the trade is an economic loss (regardless of whether it has positive cash flow) and should not be taken. It is a bad trade and you should say so without qualification.


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Nfa And Cftcrequired Disclaimers

FOREX futures and options trading have large potential rewards but also large potential risk. You must be aware of the individual risks and be willing to accept them to invest in FOREX futures and options markets. Don't trade with money you can't afford to lose. This book is neither a solicitation nor an offer to buy sell FOREX futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this book. The past performance of any trading system or methodology is not necessarily indicative of future results.

Fundamentals of Probability

This chapter reviews the fundamental tools of probability theory for risk managers. Section 2.1 lays out the foundations, characterizing random variables by their probability density and distribution functions. These functions can be described by their principal moments, mean, variance, skewness, and kurtosis. Distributions with multiple variables are described in Section 2.2. Section 2.3 then turns to functions of random variables. Finally, Section 2.4 presents some examples of important distribution functions for risk management, including the uniform, normal, lognormal, Student's, and binomial.

Brief History of Finance and Engineering

Over the last hundred years or so, the sciences of finance and engineering have become linked through the efforts of famous theoreticians like Louis Bachelier, Harry Markowitz, Fisher Black, and Myron Scholes. Black and Scholes' parabolic differential equation for the pricing of options is, mathematically, of the same type as the heat, or diffusion, equation from engineering.7 Their equation became a foundation of the options trading industry and won a Nobel Prize. The success of engineers and mathematicians at explaining complex financial instruments and markets has encouraged thousands of Ph.D.s in these disciplines to join trading and investment firms to build new and better pricing, forecasting, and risk management models for all manner of listed and over-the-counter securities and derivatives and portfolios.

The Forward Foreign Exchange Market

The forward foreign exchange market developed to assist companies protect themselves from some of the uncertainty of exchange rate movements, but foreign exchange forwards are truly appropriate for known exposures. Using them to cover contingent, variable or translation exposures could force a company to accept losses on unnecessary currency transactions. Not only that, but rival companies that leave their exposure unhedged may suddenly acquire a competitive advantage. This has, therefore, partially led to the expansion in the currency options market, which has been even more spectacular than the tremendous growth seen in the entire foreign exchange market over the past decade or so.

Section 9 Trading Resources

However, many novice option traders, as they start trading, encounter many disappointments and issues in the options markets and leave with a bitter taste, for they have unrealistic expectations and are not equipped to compete in this game. This book will help the novice option traders as well as the experienced option traders become better equipped to stay in the game and compete successfully. Some secrets are classics or old adages heard on Wall Street for many decades, but that do work. Others use the new technologies that are available today. Some secrets are common sense. Others are quite unique. Many will help you avoid paying a high tuition as you learn to trade options or try to improve your skills. Therefore, instead of owning high flying tech internet stocks that have a dramatic amount of downside risk, you could receive the same kind of leverage by buying options and utilizing option strategies yet only risking 10 of your portfolio.

Realization of the standard normal random variable

First, note that the function is symmetrical around the mean. Its mean of zero is the same as its mode (most likely, or highest, point) and median (which has a 50 percent probability of occurrence). The skewness of a normal distribution is 0, which indicates that it is symmetric around the mean. The kurtosis of a normal distribution is 3. Distributions with fatter tails have a greater kurtosis coefficient.

Introduction To Basics

Today, options provide a unique set of benefits. Not only does option trading provide a cheap and effective means of hedging one's portfolio against adverse and unexpected price fluctuations, but it also offers a tremendous speculative dimension to trading. One of the primary advantages of option trading is that option contracts enable a trade to be leveraged, allowing the trader to control the full value of an asset for a fraction of the actual cost. And since an option's price mirrors that of the underlying asset at the very least, any favorable return in the asset will be met with a greater percentage return in the option. Another major benefit of outright buying options is that an option provides limited risk and unlimited reward. With options, the buyer can only lose what was paid for the option contract, which is a fraction of what the actual cost of the asset would be. However, the profit potential is unlimited because the option holder possesses a contract that performs in...

Potential Risks That You Cannot Control When Using Real Estate Options

When I was starting out as an option investor, I bought a one-year option on a run-down commercial property in Ruskin, Florida, that belonged to a fertilizer manufacturer. And two months later, the company filed for protection under Chapter 11 of the U.S. Bankruptcy Code, and the property I owned an option on came under the control of a court-appointed bankruptcy trustee. The judge presiding over the case in U.S. Bankruptcy Court in Tampa ruled that my real estate option to purchase agreement was personalty or personal property and that I did not have an interest in the property. The case dragged on for over two years and, in the meantime, my option expired and I was out my 3,500 option fee. The 3,500 lesson that I learned here was to always do a lawsuit search on the individual or business entity that owns the property before I ever plunk down my hard-earned money to buy an option.

Stick A Toe In The Water

Consequently, buying options is the best way to start trading options. Avoid entering spreads or option writing. Just buy a small number of options to get your feet wet. If it's only going to cost you the price of eating dinner out, why not give it a try. Also, as you read this book, you will discover some hidden secret strategies to buying options.

Why Proper Money Management

All traders have one thing in common. Whether you are an options trader, a day trader, a stock trader, or a little bit of everything type of trader, you are-at least in one way-like every other trader. No matter what the market or method, every trader must make a money management decision before entering a trade. Sometimes this is not even a conscious decision. For these traders, money management never even crosses the scope of intentional thought. This is an extremely dangerous way to trade. It is amazing to me how much time traders spend researching where to get in and where to get out of the markets but then allocate to each trade with little more than a dart throw. Through my own experiences and a few illustrations, I hope to convey that proper money management is the key to success in trading.

The Workings of Option Contracts

Expiration limits the lifetime of the option. The potential profit period for the option speculator is the flip side of the advantage the short seller enjoys. Just as a short seller of stock sells and has an open position, the short seller is an options trader who initiates a position by selling the option. The short option position can be closed in one of three ways. First, it may expire worthless, in which case the entire premium received by the seller is profit. Second, it may be closed by buying back at any time, with the difference between the initial sales price and final purchase price representing profit or loss. Third, it may be exercised by the buyer, and the short seller may be obligated to complete the exercise transaction. When a call is exercised, the seller is required to deliver 100 shares of stock at the strike price. When a put is exercised, the seller is required to take delivery of 100 shares at the strike price shares are assigned to the seller.

Indiana University Kelley School of Business Indianapolis

There are alternatives to selling short in the cash market. An investor seeking to benefit from an anticipated decline in the price of a stock, broad-based stock market index, or narrow-based stock market index (e.g., a sector or industry) may be able to do so in the futures or options markets. Selling futures has several advantages to selling short in the cash market. Buying puts and selling calls are two ways to implement a short-selling strategy in the options market. There are trade-offs between buying puts, selling calls, and borrowing the stock in the cash market in order to sell short. The relative merits of using futures and options for short selling, along with a review of futures and options and their investment characteristics, are covered by Frank Fabozzi in Chapter 3.

Calls and Call Strategies

As a starting point in any discussion of option strategies, two matters have to be remembered. If you buy a call or a put option, you have the right to take certain actions in the future, but you do not have an obligation. Second, if you sell a call or a put, the premium you receive as part of an opening transaction is yours to keep, whether the option is later closed, expires, or is exercised. These two points are crucial in developing an understanding of how options trading works. If you accept the beginning argument that buying options is not normally appropriate for you as a conservative investor, but special situations can bring about an exception to that rule it is always possible that going long could be a useful strategy. It makes sense to keep the long position in reserve as one of many possible ideas. It's a mistake to simply reject a possible strategy because it is not a good fit with your overall investing theme. However, remember that, for the most part, you will not be...

You Must Be Able to Visualize a Property Being Put to a Variety of Uses

One of the keys to consistently making money as a real estate option investor is the ability to look at a piece of vacant property and visualize it being put to a variety of profitable uses. The real estate buzzword for this is adaptive reuse, which refers to putting a property to use in a way in which it was not originally intended. For example, when most people look at a vacant three-bay gas station, all they ever see is just a vacant three-bay gas station. However, when a savvy real estate option investor with a fertile imagination looks at a vacant three-bay gas station, he or she immediately sees a

Why investing in the futures market is like any other business

Conversely, in the futures and options markets there is always a buyer and seller waiting to come together and meet your price. There are no employees to handle, except your broker, and he is generally easy to deal with The liquidity which is inherent in the futures and options market, make commodities trading far more attractive than investing in other businesses.

Your Option Buying Decisions Should Include Local Property Supply and Demand

One surefire way to quickly go out of business as a real estate option investor is to buy options on properties that are not in demand in your local real estate market. If you are smart, you will follow my advice and use the information that is readily available on local economic, business, and real estate market conditions to help you determine which types of properties to buy options on. This way, you will be able to make an informed option buying decision, which is based on the local supply and demand for a particular type of property. You can stay informed of local market conditions by 1. Types of properties you are interested in buying options on.

Why Its Best to Specialize in at Least Two Different Types of Option Properties

How many different types of option properties you specialize in pretty much depends on the size of your local real estate market. At a minimum, I recommend that you specialize in at least two different types of properties. I am telling you this because in most real estate markets, very few potentially profitable option properties are usually available. And if you focus on just one type of property, you probably will not be very successful. The most profitable option investors that I know specialize in at least two different types of option properties. For example, I know one investor who buys options on single-family houses that have been damaged by sinkholes. This same investor as I mentioned in Chapter 1 also buys options on single-family houses and mobile homes that have been used as laboratories for producing illegal methamphetamine drugs. I know another option investor who specializes in buying options on building lots with condemned single-family houses, which have been slated...

The Seven Most Profitable Types of Properties to Buy Options On

The real trick to being a successful option investor is in knowing which properties to put under option so that you can create instant equity without having to spend oodles of time and gobs of money on an extreme property makeover. And over the years, I have been able to take the same derelict properties, which most uninformed investors reject out of hand as being hopeless cases, and by using just a smidgen of imagination and some old-fashioned creative thinking, I have turned them into profitable option properties. From my experiences, the seven most profitable types of properties to buy real estate options on are In most real estate markets nationwide, savvy, knowledgeable real estate option investors who really know what they are doing have very little real competition from other individual real estate investors for these types of properties. This is because the average real estate investor is not very sophisticated when it comes to putting relatively complex deals together. Plus,...

Practical Application Through Different Systems And Markets

This is another area of common confusion when money management is concerned. I often receive questions about whether my money management methods work on the British pound, or whether they work with buying options, selling options, stock trading, or whatever the market may be. To be as direct as I possibly can about this subject,

Gem Of A Benefit In Futures

One of the first things to know about buying options in futures is that you do not need to hold them until expiration. Option buyers may sell their position at any time during market hours when the contracts are trading on the exchange. Options may be exercised at any time before the expiration date during regular market hours by notifying the broker. Usually one exercises in-the-money options this is called the American style of option exercising. It is called the European style of option exercising when the option can only be exercised on the day the option expires.

The Failure of the Linear Paradigm

Before the Efficient Market Hypothesis (EMH) was fully formed, exceptions to the normality assumption were being found. One anomaly was apparent when Osborne (1964) plotted the density function of stock market returns, and labeled the returns approximately normal there were extra observations in the tails of the distribution, a condition that statisticians call kurtosis. Osborne noted that the tails were fatter than they should be. but did not see their significance. By the time Cootner's classic was published (1964b), it was generally accepted that the distribution of price changes had fat tails, but the implications of this departure from normality were widely debated. Mandelbrot's (1964) chapter in the Cootner volume suggested that returns may belong to a family of Stable Paretian distributions, which are characterized by undefined, or infinite, variance. Cootner contested the suggestion, which would have seriously weakened (he Gaussian hypothesis, and offered an alternative in...

Option Payoffs 611 Basic Options

Because buying options can generate only profits (at worst zero) at expiration, an option contract must be a valuable asset (or at worst have zero value). This means that a payment is needed to acquire the contract. This up-front payment, which is much like an insurance premium, is called the option premium. This premium cannot be negative. An option becomes more expensive as it moves in-the-money.

Dont Give Up and Quit before You Achieve Your Objective

Americans today live in a drive-in society where just about everything under the sun is available from the front seat of an automobile. And as a nation, we are the most impatient people on the planet. When we want something, we want it right now, instantaneously. Well, that type of impatient attitude may be hunky-dory when it comes to customers' expectations about the service at fast-food restaurants, but it will not fly when applied to the real estate option business. Being a profitable option investor requires consistent persistence and dogged determination, which prevents investors from quitting the first time things do not go exactly as planned. Trust me, the only thing that you can depend on in this business is that things will almost never go the way you think they should. And in a way, I suppose that is a good thing because if options were a piece of cake, everyone would be using them, and that would be bad for business. So, if you are looking for some magic formula that will...

Pearson Family as a Generalization of the Normal Distribution

Since the Pearson system allows the distribution to be more general than just normal, it adds more parameters than just the mean and standard deviation to describe the probability density. Before we explain the Pearson system, we need to define Pearson's measures of skewness and kurtosis. Skewness represents the magnitude to which a PDF has higher probability in the positive or negative direction. Positive skewness means that extreme outcomes above the mean are more likely than extreme outcomes below the mean. A negatively skewed distribution will have relatively higher probability for extreme outcomes below the mean. For the normal distribution, skewness is zero. Kurtosis measures the degree to which extreme outcomes in the tails of a distribution are likely. The normal distribution has a kurtosis of 3 (mesokurtic). Distributions with fatter tails are leptokurtic, and distributions with smaller tails are platykurtic. Definitions of Pearson skewness and kurtosis measures are

Select the Investment

Because the value of an option is based on the underlying stock, a working knowledge of the stock market is imperative. If you know nothing about the stock market, you will know even less about how to trade options. For people who have never invested before, starting out in trading by using options is akin to trying to learn math for the first time by starting with calculus. Therefore, you need to know the stock market in order to trade options because you need to know how to pick stocks and make informed and reasonable predictions about the direction the stocks will move. The first step in placing a trade is selecting the underlying stock.

Fixed Fractional Tradingthe Math

When applying the Fixed Fractional method to futures and or options trading, it can be stated a different way. For example, if your largest risk on the next trade equaled 1,000 and you decided not to risk more than 10 percent of an account on any given trade, the following formula will tell you what the minimum account must be to make the trade

Extreme Bearishness Threshold Level Analysis

The results of a 10 percent buy threshold level, which produced excellent results in nearly all time frames, are presented in Table 4.1. It contains the time frames T + 5 (5 days after threshold penetration) through T + 240 (240 days after penetration of a threshold). Overall, the extreme sentiment threshold levels produced an average change in price of 5.31 percent in the T + 40 and shorter time frames. The average change in price rose to 12.03 percent in the T + 50 and longer time frames. Comparing these results with the historical random average change in the price of the S&P 500 during these same time frames, seen in Table 4.1, there is no question that it pays to trade against the options trading crowd when these traders become excessively bearish. The average change in price of the S&P 500, for example, is just .33 percent for the shorter time frames and .45 percent during the longer time frames, a significant difference.

Remember Your Plan and Stick to It

This chapter is not an exhaustive review of the mechanics and strategies of options trading or the specific characteristics of options. We assume you have a basic understanding of options and a familiarity with many of the strategies. The review is meant to merely give an overview of the strategies and present some other tools available to option traders. The tools presented in this chapter are necessary not only for successfully implementing the SCORE trade management formula, but also for taking advantage of various adjustment strategies covered in this book.

Dont Run Out and Form a Separate Business Entity before You Do Any Deals

Do not make the all-too-common mistake of running out and forming a separate business entity before you have done any option deals. As far as I am concerned, it is totally asinine for aspiring option investors to go to the effort and expense of forming a separate business entity solely for the purpose of buying options before they even know if they are cut out to be an option investor. However, to those of you reading this book who do go on to become profitable option investors, I very highly recommend that you form a separate business entity such as a Sub-chapter S corporation or limited liability company to buy options through. It is one of the best and least expensive methods available to help reduce your risk and limit your personal liability as a real estate investor. This way, there is a clear distinction between your personal and family assets and the assets held by your corporation or limited liability company. And, in most cases, any liability incurred by the business entity...

How Obsolescent Properties Can Be Put to Their Most Profitable

The only reason I invest in real estate instead of widgets is that it is one of the very few businesses left in America where private individual investors can profit handsomely by turning problems into opportunities. And nowadays, white elephant properties can be a bonanza for savvy option investors who have the ability to visualize new lives for buildings that have outlived their original use. In fact, today's real estate lexicon is peppered with buzzwords that are used to describe how obsolescent properties can be put to their most profitable use and includes terms such as And as I told you in Chapter 2, to consistently make money as an option investor, you must develop the ability to look at a piece of vacant property and come up with a variety of viable uses for it uses that your competitors have overlooked, but which make economic sense. For example, for over two years I drove by a boarded-up gas station located near MacDill Air Force Base in Tampa until one day it dawned on me...

Strategic Timing and Short Term Price Changes

Consider the possibilities in options trading when markets are exceptionally volatile. Most of your capital may be tied up in long stock positions that would produce losses if sold when market prices are low. You recognize that this is the time to buy more stock, but you are uncertain, and you do not have capital available to make a bold move even if you wanted to. This is the perfect opportunity using a limited amount of capital, of course to buy cheap calls. You know that sharp market drops usually rebound quickly. You also recognize the stocks whose fundamental strength supports the probability of a healthy return to the normal trading range. So, picking the bargains is not difficult the decision to put money into the market at these moments is the difficult part.

Avoid An Options Last Month

One reason such depreciation may occur is because option investors sell (write) options the last month before expiration. In fact, I write options a day or two before the last month begins (expiration of the previous month). Nevertheless, sometimes I buy options with one month or less before expiration if they are extremely cheap and undervalued and if the underlying stock or futures price is close to the strike price.

Why the Sublease Option Strategy Isnt Financially Feasible

The main reason I am not a fan of the sublease-option strategy that is being taught today is that it is not financially feasible. In other words, there is just not enough profit in most sublease-option transactions to make them financially worthwhile. For example, under a typical sublease-option scenario, a lessee-optionee would be lucky to receive from a tenant-buyer a 1,000 option fee and a monthly sublease payment that is 100 above his or her lease payment. In most cases, what appears on paper as a 100 a month positive cash flow really is not. This is because most investors involved in sublease-option transactions never bother to factor in the amount of time they spend managing property as a business expense. If they did, they would come to the quick realization that they are working for minimum wage. I do not know about you, but to me, the prospect of working for minimum wage, especially as a self-employed real estate investor, has zero appeal However, low wages are not the only...

Most Investors Dont Have the Cash Reserves to Subsidize Sublease Options

The fact of the matter is that most real estate investors are woefully undercapitalized and do not have the deep pockets or cash reserves that are usually needed to subsidize sublease-option deals. Few serial sublease-option investors are around because most people go broke supporting their first sublease-option deal This lack of operating capital creates a domino effect whenever there is any type of financial emergency. For example, when a tenant-buyer fails to pay the monthly sublease payment, the lessee usually has no money to make the lease payment to the property owner, which forces the owner to initiate eviction proceedings against the lessee for nonpayment of rent. This in turn forces the lessee to start the eviction process against the tenant-buyer for failing to pay the rent. And if the lessee cannot come up with the money to pay the lease payment, the lessee will end up losing the real estate option, and the only thing he or she will have to show for their time, effort, and...

Beware Of Delusions Of Grandeur

Most option buyers have totally unrealistic expectations. There is a tremendous amount of hype about how much you can make buying options. Many option experts promise 100 and even 1000 returns each year. Unfortunately, most option investors lose, and most get discouraged very quickly when their dream of quick riches vanishes.

Selling Options why should I do it

Up to now, we have talked about buying options. But it stands to reason that when someone buys an option someone else is selling options. In any given transaction, the seller may be someone who previously bought an option and is now liquidating it. Or the seller may be an individual who is participating in the type of investment activity known as option writing. The attraction of option writing to some investors is the opportunity to receive the premium that the option buyer pays.

Fraud Scams and Off Exchange

Even though there is no Exchange (central clearinghouse) for currency trading, broker-dealers who operate from telephone boiler rooms are still referred to as off-exchange. Beware of these practitioners and avoid them like the plague. Most of them have no web site or a few shoddy pages built in straight HTML and operate primarily via telephone solicitations. They typically sell FOREX options. (See Chapter 19 for information on legitimate FOREX options trading.) They are almost never registered with the CFTC, NFA, or any recognized regulatory body.

Conditional Heteroskedasticity

The effect of volatility clustering is also called autoregressive conditional heteroskedasticity (ARCH). It should be noted that small autocorrelation in squared returns does not necessarily mean that there is no volatility clustering. Strong outliers that lead to high values of skewness and kurtosis may lower autocorrelation. If these outliers are removed from the sample, volatility clustering may become apparent 3 .

Margin Requirements and Trading Restrictions

There are two areas in which option investors have to live with special rules taxes and trading restrictions. The tax rules are covered later a more immediate concern involves the special financial requirements that apply once you move beyond the status of stockholder and begin to make actual option trades. The second restriction is intended to limit the volume of trading undertaken by investors with limited capital. The Securities and Exchange Commission (SEC) defines a pattern day trader as any individual who makes four or more day trades within five business days. A day trade is opening and closing a position within a single day. Once you make the fourth day trade within a five-day period, you are required to maintain at least 25,000 equity in your account (in cash and securities). For many options traders, the restriction certainly applies. So, unless you can limit activity to three or fewer, you will be treated as a pattern day trader.

Changes in forward and derivative trading

While there are some electronic (screen-based) forwards matching and electronic options trading products, they are very different animals to spot. Forwards tend to move at a slower pace, giving participants time to counter-bid and offer in the hope of dealing at a slightly better rate. In the options markets, brokers still play a major role in price discovery. The FX options market, like spot and forwards, appears, conversely, to have stopped growing. Between 1995 and 1998, daily volume more than doubled from USD 41 billion to USD 87 billion. In the following three years, however, it declined by 31 to USD 60 billion. There is anecdotal evidence that new accounting regulations, such as FAS 133 (for companies that report under US GAAP - Generally Accepted Accounting Procedures), have caused many companies to revert to using outright forwards to manage their currency exposure. The way the options market operates has changed little. There is still a thriving voice broker and interbank...

How You Can Use Options to Profit from Properties with Correctable Problems

The one thing that the most profitable types of option properties all have in common is that none of them will ever be mistaken for a so-called blue chip property. The term blue chip is used to describe properties that have a flawless appearance, are in pristine condition, and are situated in prime locations. As you will soon see, none of the properties that I write about in this chapter fit that bill. In fact, the chances that the average real estate option investor has of ever putting a trophy-type property under option are slim and none. I say this because the owners of highly sought-after properties can pretty much name their own sale price and terms and have no compelling reason to sell an option to anyone whereas owners of vacant properties with various types of problems, which scare off most prospective buyers, are in no position to be choosy when it comes to how they sell their property. And this is exactly why one of the most profitable types of properties to buy real estate...

The Omega Theta Vega and Rho of an Option

One unit (usually the unit is one week) vega (W), the change in option price with respect to a 10 change in volatility, and rho (p) the reaction of the option price to changes in the risk-free rate. For example, if a p 0.5 the option's theoretical value will increase by 0.05 if the interest rate is decreased by 1 . The information about the Greeks, usually accompanied by the definitions of terms, is increasingly being made available by brokerage houses for the convenience of options market investors. In this chapter we have examined derivative contracts as first a method of hedging risk, and then as a source of collecting information about the perceived volatility of the market. In later chapters these measures will be used as a means of improving our historical estimates of downside risk with forward-looking measures from the options market. STRIDES are useful for small investors for two reasons (i) They allow a bullish investor to earn a high yield without incurring further costs...

How You Should Use the Problem Property Option Strategy

Their problem properties themselves usually do a pretty lousy job of marketing and end up with no takers. They do not know how to conduct market research to identify prospective buyers who could possibly have a use for their property. And luckily for us savvy option investors, they usually fail to look beyond the borders of their own local real estate market for so-called niche investors, who specialize in buying properties with every imaginable type of problem. These niche problem property investors run property wanted ads in professional real estate trade publications and newspapers with national circulations, such as the Wall Street Journal and the New York Times. For example, I have resold options on two problem properties that were contaminated with hazardous waste material to niche investors who specialize in cleaning up contaminated properties, whom I found through ads in trade publications.

How to Buy Options on Properties Destroyed by Natural and Man Made Disasters

First things first You must be very careful when using this option strategy, so that you are not perceived as just another sleazy opportunist trying to take advantage of the plight of disaster victims. And this is why it is best that you never contact any property owners in disaster areas until after the dust has had a chance to settle. I am telling you this because after every man-made and natural disaster, there is always a segment of the population, especially in the areas that have been the hardest hit, who throw in the towel and take their insurance money and run. And property owners who have been reimbursed by their insurer for their loss but, for whatever reason, have no desire to rebuild are the owners who are most likely to sell an option to purchase their destroyed property. Savvy option investors can buy a one- to two-year option to purchase the property at a bargain price, clear away the rubble, and wait until the recovery is well underway, and then resell or exercise...

Squeeze Play I Pulling the Price Trigger

The Squeeze Play I option sentiment trading system explored in the previous chapter allows trade entry, either long or short, if the EMA5-21 oscillator value has been above zero (longs) or below zero (shorts), and then experiences a crossover. Just to reiterate what is happening during this crossover, when the oscillator crosses to the negative, the options trading crowd moves from a previously bearish mood to a bullish state. This is captured in the faster-moving EMA5-21 oscillator, so the hope is that it catches the start of a sentiment reversal. The presumption is that sentiment is experiencing a sudden change, from what were excessive levels before the cross. At this point, there is no specification in the system code to require any specific prior level of extreme sentiment. The sentiment measured in the EMA5-21 oscillator just needs to have been above average levels of sentiment, then suddenly to have reversed to get us into the trade. As for exits, when the slower (EMA21-50)...

Strategys Historical Performance Analysis

The Value at Risk (1 month, 99 ) means that We have a 99 probability of not losing more than -2.7 of the investment in the next month . Instead we have observed a monthly performance of -6.2 . There is nothing wrong because, as usual, we must read statistics very carefully. The distribution of monthly returns is asymmetric (Skewness equal to -1.31) and with fat tails (Kurtosis greater than 3) and this implies that we cannot use the VaR to estimate an extreme value of the distribution, because we need many more observations.

Users of Currency Options

Writing options on exchanges tends to be simpler as the credit risks are controlled by a margin system. The margin is a small percentage of the value of the contract, which must be deposited to cover losses up to a certain limit. The margin is usually adjusted on each trading day and occasionally more frequently to take account of market movements. However, the greater flexibility available in the OTC market allows some of the credit difficulties to be pursued and overcome. Participants in the foreign exchange currency options market include

Squeeze Play I To The

As a measure of the unsophisticated options trader sentiment. First applied to the S&P 500, the system was then run on the Dow Jones Industrial Average and NASDAQ 100 (without optimization), and finally the OEX S&P 100 equity index. Performance was quite consistent across each of these equity indices. Calculating dollar rates of return using futures contracts, gains were highest (1,222 percent) on the NASDAQ 100 for the seven-year period of the test and the lowest on the DJIA (900 percent). Total return on the S&P 500 futures contract was 951 percent for the period. The average annual gain for the three contracts combined was 146.3 percent. The tests did not include commissions and slippage, but given the small number of trades and the type of position trading employed, this would have had only a minor impact on performance. Later, in tests that take many more trades, I factor commission costs into the performance results. A look at the most active puts and calls at the Chicago Board...

The Normal Approach to Data

Measures of central tendency, shape, and variance, known as descriptive statistics, are shown in Table 3-6. The values in the shape statistics measure something known as ''tail behavior.'' One of these is skewness, the measure of how much the distribution is not symmetrical. The other is excess kurtosis, Excess kurtosis

VaR from General Parametric Densities

Recall the discussion of the Pearson family of densities from Chapter 2 and Appendix 1 of that chapter. These are readily used as a generalization of the normal density. The Pearson family remained a theoretical curiosity for the last century from the viewpoint of finance. However, thanks to modern computers and software tools, the Pearson members have become practical for applications in finance. Rose and Wood (2002, ch. 5) discuss computer tools for estimating in a fairly mechanical fashion any member of Pearson types I to VII from data on excess returns. The software first estimates the moments of the density and plots a graph of skewness parameter versus kurtosis parameter on the two axes. The software also indicates from that plot which Pearson type the data belongs to. The user specifies the type, and software fits it to the data. Chapter 2 gave an example of an estimator based on Pearson family for computation of VaR(a').

Implied Volatility And Other Measures Of Downside Risk

(Excess kurtosis)jD (1 T) (384 + 6S282 + 64) Ojd 2 If the Poisson parameter l is zero, jump diffusion reduces to the simple diffusion with zero skewness and zero excess kurtosis. If the size of the jump shock is negative on an average (8 0) the distribution of stock returns is skewed to the left. The call option price of the jump diffusion is a cumulative sum of PO(l) times the Black-Scholes price or

The big picture

If you only looked at the daily charts and you want to trade three to four months out, you will probably be making the wrong trade. This is especially true if you want to trade options, and four months down the road the trend changes. Now all the options you bought are worthless.

Pay a Finders Fee for Information That Results in the Purchase of an Option

Without the cost of a weekly payroll. I know an option investor in Orange County, California, who specializes in buying options on properties that have been stigmatized by being the scenes of violent crimes. To find these types of properties, this investor has enlisted the help of the technicians who work for the companies that specialize in the grisly job of cleaning up crime scenes. This guy pays a 500 finder's fee for every property he buys an option on.

Questioning the Assumption of Normality

Let us now address the non-normal issue. The assumption of normality is often convenient, but also often troublesome. We already suspect that the distribution of evrs is not normal because normal distributions are symmetrical (skewness 0) and have ''skinny'' tails (kurtosis 3). Neither is the case for the evr data as the reports in Table 3-6 show. Skewness and excess kurtosis are indications of non-normality which may be the result of extreme values. Our concern is that extreme values are common in this process (market) and that this sample is drawn from a population that has a similarly skewed and heavy-tailed shape. 2 Excess Kurtosis2 Skewness H--

Taylor Series Links EUT Moments of fx and Derivatives of Ux

The phrase expected utility in the name EUT erroneously suggests that it might be concerned only with the expected value or the mean of the underlying probability distribution f(x). The aim of this subsection is to show that EUT encompasses variance, skewness, and kurtosis (higher order moments) Vinod (2001) discusses the following remarks. Equation (6.1.6) with U 0 states that the expected utility never becomes small when x becomes large. When we assume that U 0, the contribution of the variance s2 to E(U(x)) is negative, which makes intuitive sense, since high variance similar to risk is undesirable. If U 0 in (6.1.6), then the contribution of m3 to the expected utility has the same sign as m3. Note that negatively skewed f(x) have bigger left tail (losses) compared to the right tail (profits). In other words, U 0 leads to a preference for positive skewness. Similarly U 0 leads to a preference for less probability mass in the tails (reject fat tails or prefer high peaked density or...

An Interview with Robert Prechter

None of the famous traders had any influence on me. My primary early influences were Richard Russell in the area of market analysis and Dick Diamond in the area of trading. Russell taught me that technical analysis was proper and reasonable. My friend Diamond taught me how to trade options.

How could hedge fund investors be aware whether a manager was mispricing stocks in the portfolio

In the beginning it was about 10 percent, but as he lost more and more money, the portion of the portfolio in privately held companies continued to grow. By the end, privately held stocks accounted for a major portion of the portfolio, and he was largely left with a bunch of nearly worthless paper. It sounds as if he was gambling in the options market and hiding his losses by marking up his private deals. Wouldn't the truth come out when investors redeemed their money and received back much less than the reported net asset value

Retirement Plan Wake Up Call

I am currently an employee with the State of California and have the ability to start setting aside trading capital in a 457 plan with Charles Schwab at the rate of 1000 per month. I am considering purchasing the Turtle Trader course. My concern is that although the tax benefit is huge, I will not be able to do any short selling or trade anything that is not on a cash up front basis. For options trading I am restricted to writing covered calls and buying puts against long positions. Since the putting 1000 a month into a self directed retirement plan cuts my taxable income almost in half, it seems pretty great, but if the restrictions force me into a long-term buy and hold investment strategy My basic question is this Can I effectively trade the Turtle system with these restriction and if so, how much will I be hampered by not being able to short sell on a margin account. Would I be better off just paying the taxes and putting the money into a margin account with a discount broker

How to Perform Due Diligence on a Potential Option Property

ver the past 24 years, my real property research credo has evolved into Trust no one, assume nothing, verify everything, and be prepared for anything I have learned the hard way not to automatically assume that all of the information contained in the official public records about a property is complete, up-to-date, and 100 percent accurate. It usually is not. The only way to obtain reliable, up-to-date information on a property and its owner is to go directly to the source of the information and then verify it, which is exactly what due diligence is all about. The purpose for performing due diligence on a potential option property is to gather the most up-to-date and verifiable information available in order to make an informed option buying decision. And, given the Internet and the vast amount of property-related information that is readily available online today, there is absolutely no valid excuse for anyone not to perform due diligence on potential option properties before they...

Features Of The Listed Market

Open and orderly marketplace - prices in the crowd may be given by market makers (also referred to as registered options traders), specialists or floor brokers representing customer orders. A specialist, designated by the Exchange to represent a particular currency, is responsible for maintaining fair and orderly markets and disseminating the best-quoted prices for each series in standardised options. In addition, specialists are responsible for the proper execution of orders entrusted to them. Customised options do not have a specialist. Instead, market makers are assigned to particular currency pairs and are responsible for making two-sided markets. While standardised options are quoted continuously, customised options are only quoted upon request. Both standardised and customised options are marked-to-market daily. Trading hours - for the PHLX, their currency options market is open for trading from 2 30am to 2 30pm Eastern Time, Monday through Friday (except for standardised...

Element 2 Time and Extrinsic Value Premium

Time works for the seller and against the buyer. Buying options can be highly speculative because the buyer has to hope not only that the stock rises enough to create intrinsic value prior to expiration but that the growth in price also rises far enough to offset lost time value. Because time value evaporates as expiration approaches, this is difficult to

Global Futures Fear Indicator

Start buying good value stocks whenever the readings of this index fall below 0. This takes of course a lot of guts because the opinions of the widely quoted gurus are usually contrary at this time. Unfortunately this indicator does not tell you when to sell. Set yourself a limit if you trade options or use trailing stop-loss orders if you are a long-term investor.

Theoretical Valuation

The vega or volatility risk of an option is the extent to which the valuation will change with varying estimates of volatility. The theta, or time decay, is the decrease in value of the option as it approaches maturity, as an option is a constantly diminishing asset. Finally, every option has forward foreign exchange risk equivalent to the delta and an interest rate exposure based on changes in funding costs. The delta and interest rate risks can be hedged easily in the relevant markets. The dynamic nature of the other risks is the essence of the options market.

Examples Of Other Models

As already has been mentioned, Black-Scholes is by no means the only model being used in the options market today. Theorists have devoted a substantial amount of time and effort developing mathematical models for pricing options and a number of different models exist as a result. All make certain assumptions about market behaviour, which are not totally accurate but which give the best solutions to the price of an option.

Concluding Comments

Tremendous growth in the exotic options market across all asset classes has rendered certain types of first generation exotic options such as barrier and binary options almost vanilla in nature. With this growth expected to continue, the thin boundary separating vanilla and exotic options is likely to dissipate as investors become more familiar with pricing models and how to manage option risk on both an instrument level as well as on a portfolio level. As more products are introduced into the marketplace, the traditional asset allocation landscape is expected to change and accommodate a greater diversity of alternative assets to which exotic options will form a significant portion of.

Pearson Type IV Distribution for Our Mutual Fund Data

We can see from the estimates in Table 2.1.2 that the normal distribution is not appropriate. Kurtosis is high, and the returns are negatively skewed. If we plot the observed point in a diagram with Pearson's skewness p1 on the horizontal and p2 on the vertical axis, as in Figure 2.1.1, we note that AAAYX mutual fund falls in the region of Pearson's type IV curve. This is not good news. Type IV is the hardest to work with since it involves imaginary roots of the quadratic in (2.1.6), so we expect difficulties in computing the quantiles for our VaR calculation. However, we can obtain an analytical expression (2.1.9) (the calculation is given in the Appendix at the end of this chapter and in Chapter 9) for its observed density using four moments (which are parameters of the underlying distribution)

Adapting Put Call Ratios to Bond Futures

Similar to the stock market, the options trading crowd can be relied upon to furnish the fuel needed to power bond market trades to profitability. The same dynamic of crowd psychology, identified with bond option put call ratios, can be found to work in the market for bond futures.

Testing For A Nonnormal Distribution

Together skewness and kurtosis can tell us whether we might be surprised by extreme returns. For example, a skewness near -1 and excess kurtosis greater than 1 together indicate that we would experience more large negative returns than standard deviation would indicate. We are interested in whether taken together the skewness and kurtosis statistics indicate whether or not the distribution of returns was normal or not. The Jarque-Bera (JB) test can be used for this purpose. . 2 (Excess kurtosis) Skewness +- . 2 (Excess kurtosis) Skewness +- The JB test compares the skewness and kurtosis values to the expected values if the distribution were normal. A JB test result of greater than (about) 6 on a large data set indicates that the return distribution may not be normally distributed. The sample fund and index both have JB statistics well below 6, but our example uses only 13 monthly fund and index returns, and the JB test is not useful for such a small number of observations. N 357...

Significance Test For r

Tests for normality suitable for the data in Figure 11.3 include the Lilliefors test and the Shapiro-Wilks test. However, these are not available within Excel (the interested reader should refer to a more advanced statistical text and specialist statistical software). A guide to normality can be obtained within Excel by using the statistical functions KURT(array) to calculate the kurtosis of each data set (shown in row 18 of Figure 11.3), and SKEW(array) to calculate the skewness of the data set. The kurtosis function compares the shape of a data set with the normal distribution. A value of zero represents a perfectly normal distribution, but this will rarely happen in practice. Positive values represent a distribution that is more peaked than the normal distribution, while negative kurtosis values indicate a distribution that is flatter than the normal distribution.

Options On Stock Indices

Several exchanges trade options on stock indices. Some of the indices used track the movement of the U.S. stock market as a whole. Some are based on the performance of a particular sector (e.g., mining, computer technology, and utilities). Some are designed to track the performance of a foreign stock market.

Trading Options With The 5 Day Momentum Method

I will begin this section by telling you I am not an options trader . I trade equities and this keeps me busy enough. There are, though, many people who focus on the options markets as a leveraged way to make their money grow. Unfortunately, the overwhelming majority of traders lose money buying options. My observation is they commit two trading sins 1) They guess where the market (stock) is going and 2) when they are wrong, they don 't use stops and they let their options go to zero. In my opinion, The 5 Day Momentum Method lends itself well to short-term options trading and it helps cleanse the above mistakes.

How to Accurately Estimate a Propertys Current Market Value

I rom what I have seen over the years, buying options on overpriced properties is the number one reason many people fail to make it in the real estate option investment business. And for most beginning option investors, overestimating the value of their first option property usually proves to be a very costly and often a fatal mistake, which generally marks the beginning of the end of their foray of investing in real estate options. You must understand that when you assign or sell a real estate option to a third party, what you are really selling is the property under option. This means that if the property under option has a purchase price that is right at or above market value, it will be nearly impossible to find anyone willing to buy your real estate option. I know an investor in Las Vegas, Nevada, who learned this lesson the hard way when he bought a one-year option for 10,000 on a former gas station, which had been sitting vacant for two years. This neophyte investor...

The Option Clearing Corporation

The Option Clearing Corporation (OCC), the clearinghouse for options trading, is jointly owned by the exchanges on which stock options are traded. The OCC places itself between options traders, becoming the effective buyer of the option from the writer and the effective writer of the option to the buyer. All individuals, therefore, deal only with the OCC, which effectively guarantees contract performance.

The Fundamental Equation Of Trading

Now we will take the exact same trades, only, using the Black-Scholes stock option pricing model from Chapter 5, we will convert the entry prices to theoretical option prices. The inputs into the pricing model are the historical volatility determined on a 20-day basis (the calculation for historical volatility is also given in Chapter 5), a risk-free rate of 6 , and a 260.8875-day year (this is the average number of weekdays in a year). Further, we will assume that we are buying options with exactly .5 of a year left till expiration (6 months) and that they are at-the-money. In other words, that there is a strike price corresponding to the exact entry price. Buying long a call when

Dynamic Gamma Scalping

An alternative can be to buy premium with each adjustment. This strategy can work well if the futures move in one direction. One buys the delta equivalent amount of puts on the way up and the delta equivalent amount of calls on the way down. However, if this strategy had been used in my example, a large loss would have been incurred because of the premium decline on the opening. On days when implied volatility increases, traders profit very well from buying options to scalp their gamma because their hedges either do not lose as much as the futures would have lost, or they do not lose anything at all. On days when volatility is very high and the market goes up, the puts can increase in value as well, and the strategy will be extremely profitable.

Working with Random Entries

To calculate the kurtosis of a variable you can use the kurt function in Excel. In the case of the daily distributions of returns for the S&P 500 index, kurtosis equals 56. A positive value means that the distribution is leptokurtic a negative value means that it is platykurtic. When building a trading system we would prefer for the distribution of returns to be platykurtic, so that we make sure that the system does not stand or fall with any large out Iyer trades. This is a two-edged sword, however, in that a positive value for the kurtosis also might indicate that we are doing a good job of keeping all our trades as similar as possible to the average trade. If that is the case, the kurtosis should increase with the number of trades from which we can draw any statistical conclusions, while the dispersion of these trades stays the same. That is, we are not changing the levels at which we take our profits and losses. For instance, if we have a normal distribution, we...

The Gold Digger System

Of course, we might have decided on a different maximum trade length and, for instance, looked for an optimal value in the same manner as we did with the Black Jack system in Part 2. If that had been the case, we also could have used the measures for skew and kurtosis that seemed to be producing the most stable results. But for now, let us settle for the five-day limit to a trade. As was the case with the original system, we will test this strategy on the RAD contract for the S&P 500 index futures contract, covering the period January 1995 to October 1999. Kurtosis for the kurtosis, which suggests that so far the system is leptokurtic and, hence, does not produce stable returns. However, with the proper set of exit techniques we should be able to lower the kurtosis into negative territory while keeping a positive skew. that the distribution of returns indicates that the right-hand tail is stretching out further than the left-hand side. This is generally good and an indication that we...

Using CAPM for Capital Investment Decisions

Normality of the Distribution of Returns. The asymptotic validity of the tests of CAPM type models depends crucially on the iid-normal assumption (identically and independently distributed). The empirically observed distribution of returns, however, is generally not iid-normal in practice. In particular, one observes skewness, excess kurtosis, conditional heteroskedasticity (changing variance), as well as, serial dependence over time (this will be discussed in Chapter 4). The nonnormality by itself does not reject the CAPM. The issue is whether the results of statistical tests of CAPM-type models are reversed when the iid-normality assumption is abandoned and corrections are made. We now turn to the available evidence suggesting that conclusions of CAPM tests may well be reversed if the iid-normality assumption is invalid.

Information extraction from overthecounter currency options

This information usually comprises Black-Scholes implied volatilities for at-the-money forward options,153 as well as prices for some option spreads, such as risk-reversals and straddles. Thus, it provides very useful information about respectively the skewness and the kurtosis of the exchange rate distribution.154

Combination Trade Strategies

Your potential participation 10-fold. At the same time, your exposure is limited to the premium, as previously mentioned. The financial aspects of any particular transaction can dictate the strategy that is most effective. Keep in mind that the zero margin only pertains to buying options. This is because exposure is limited. If you decide to sell options, you must post margin. However, the premium you collect adds to the value of your account.

How to Negotiate Low Cost Options and Below Market Purchase Prices with Property Owners

In my more than 24 years as a real estate investor, I have seen real estate investors ranging from neophytes just starting out to self-proclaimed seasoned veterans get snookered into overpaying for property, all because they were unable, for whatever reason, to master the fundamentals of negotiations. This hapless group of investors failed to grasp the very basic concept that when it comes to the terms of a real estate transaction, everything, and I do mean everything, is negotiable. They did not understand that, unlike your local Home Depot where every item in the store's inventory has a universal product code or UPC that lists the product's non-negotiable sale price, how much you pay for a real estate option or property really depends on how good a negotiator you are. And if you are a shrewd negotiator, you can buy low-cost real estate options and properties at below-market purchase prices. But, if you are a poor negotiator, you will probably end up paying way too much for your...

The Meander System Weekly Data

Kurtosis From Table 11.7 we see that this is not a bad start at all, compared to Gold Digger at the same stage. A high profit factor is complemented by a high average trade. The standard deviation is somewhat high, but a slightly higher ratio between the average profit and the standard deviation shows that the Meander, at this stage, manages to produce a higher risk-adjusted return than Gold Digger. The drawdown is a little too high, but could probably be worked on with a well-working stop loss and some type of filtering technique (to be added later). Another positive factor is the positive value for the skew, in Table 11.8, which means that the Meander, too lets its profits run while cutting the losses short. The very high positive value for the kurtosis is, however, a negative factor at this point, indicating that the individual outcomes are a little too centered around the mean. Kurtosis Are we good, or what As can be seen from Table 11.9, although the average trade and profit...

The Oex Early Exercise

An exercise usually takes place from just after the cash market closes (3 00 P.M. Chicago time) until the futures and options close (3 15 P.M. Chicago time) when the OEX combos or the S&P futures at the CME make a significant move in either direction. If there is a large move in the market, traders take the opportunity to buy sell the S&Ps and exercise the OEX calls puts that are far enough in the money. Traders have until 3 20pm, or five minutes after the options market close to exercise, and public customers have a little bit more time. Far enough in the money means that they could either buy the same strike puts, for example in the case of a break (market decline), for significantly less than the combo's discount to cash (dividends on the basket minus the implied carry) and still be in the conversion (inter-market spread), or buy the same strike puts a lot cheaper than they have recently been trading for. Conversely, if there is an after-cash-market rally, traders will sell the...

How did you get started writing investment software

The first thing 1 did wras read Edwards and Magee (Technical Analysis of Stock Trends, see Appendix 3), and memorise that. 1 was basically using that to trade options at 20 years of age, and at the same time still doing my real estate stuff. When I was 21, I developed a residential apartment complex in Texas, near where 1 was studying, and made some money out of that. Basically 1 was making money out of real estate and at the same time starting my stock market trading.

Six Basic Rules to Follow When Negotiating with Property Owners

Please keep this in mind the next time you get the urge to speak out of turn while the other party is still talking. Rule 3 Limit the use of tall tales, little white lies, and fibs to describing fishing and hunting exploits and not your background. The fastest way to lose credibility during negotiations is to get caught in a boldfaced lie. I immediately cease negotiating with anyone who tries the old dazzle them with brilliance and baffle them with bullspit technique on me. I do this because I have adopted a zero tolerance policy, which prevents me from negotiating with people who employ games, gimmicks, and bullspit as a major part of their negotiating strategy. Years ago I made a solemn vow to myself that I would never again waste my valuable time and energy negotiating with ethically challenged people who cannot make the distinction between fact and fiction. Rule 4 When negotiating with property owners, use the time-tested KISS principle Keep it simple,...

Five Negotiating Tools You Can Use to Obtain Lower Prices and Better Terms

If you followed my advice in Chapters 10 and 11 and thoroughly researched the property and its owner when performing due diligence and if you had the property thoroughly inspected, you should have a pretty good idea as to what information you can use to help negotiate favorable terms. Here are five negotiating tools that savvy real estate option investors can use to their advantage to negotiate low-cost real estate options and below-market purchase prices on buyer-friendly terms

Strt 05 of251 of75 atmt

If the implied volatility is similar for the strike prices of the options included in the strangle, the average of those option volatilities must be close to the implied volatility of the at-the-money forward option and the strangle price will be around zero. Therefore, the strangle price may be considered as a kurtosis indicator, given that it provides information about the smile curvature. As previously said, these volatilities contain information on the distribution's skewness and kurtosis. However, this information is not enough to characterise the whole distribution of the underlying asset price. Besides, with only three values in the delta-volatility space, the RND estimation is not possible.

Stable Pareto and Pareto Levy Densities

Pareto Levy Stable Distribution

The stability property of distributions often refers to a shape parameter, which stays the same regardless of the scale. Rachev and Mittnik (2000) is a huge book devoted to a discussion of the properties of distributions include the estimation of stable distributions in finance. We discussed the simple Pareto density in Section 4.4.1. Here we consider its extensions, which are of interest in finance because they have various desirable properties of fat tails, excess kurtosis, and skewness, for example. The derivation of the stable Pareto density is done by starting with the so-called characteristic function of the Pareto, that its density is quite intricate. Since we are assuming that the reader is not familiar with mathematical statistics, we begin this subsection by explaining the moment-generating function, characteristic function, and related statistical concepts. Readers familiar with these concepts can skip to the characteristic function of stable Pareto in (4.4.6) and (4.4.7)....

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