Finance: Capturing Convex Payoffs

Don't know much about options strategy but gold is much more stable than silver and is unlikely to have big spikes. I would personally look to silver as it has a lot more upside potential IMO

I don't know shit about options, but there is a penny stock that was almost very kind to me, as well. CBIS. I should've played it before the recent legalization in Washington and Oregon? I need to look into options.

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You are also missing chapter 1 of every intro book to finance there is: the time value of money. Your cost after 2 years will not be 235 but 235e^(r2) (where r is some discount rate)... =)

yes I know, care to comment about something actually meaningful to the discussion between options strategies in this context bro?

sry, short fuse. but I'm just not trying to hear about nerdy nit picky stuff in this blog because I've not actually presented a trade but a theoretical one in a world that doesn't contain rates. I should mention it in the original post. Thanks for reading, and thanks for mentioning it dude.

BTW The real reason is that when you're comparing strategies with a heuristic to choose the one with the smallest net cash outlay (expense) AND very similar/the same durations, the meaningfulness of rates becomes much less. Plus cash or t bill collects maybe .01% interest right now and I don't believe in an economic risk free rate. You either have money or not, just like you either have exposure or not IMO.

i think most people understand that convex payoffs are good. but...

ok, so here's what you need to understand:

1) Most people lose money when they speculate with options.
2) Banks like to sell options for extra profit (because guys like you and me like to buy them). They buy them to hedge their portfolios, less for speculation.
3) Options are priced with volatility in mind, so if something has a lot of potential upside, the corresponding options will also cost more.

Not really knowledgeable enough to comment other then this:

1. I think that IAU Gold Bullion might not actually hold all that gold, it might be that a lot of it is just "paper gold". Just what I've read though, might be thinking of the wrong fund too.

2. Gold is likely to hold it's value over time, the dollar is not. I'd take this as a "shorting the dollar" bet. I like it.

this strategy is lolbad as it doesnt mention statistics once

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On December 11 2012 09:00 2c0ntent wrote: Show nested quote + On December 11 2012 03:49 julep wrote: this strategy is lolbad as it doesnt mention statistics once LOL Perhaps I should run some models using a couple of the "most likely futures" and build strategies based around trying to predict the future with comically oversimplified and reality-blind statistical models. o wait nah. If you don't want to actually discuss the topic and you don't even know what's going on in the OP it'd be wise to just re-read before posting, or just leave the blog, or let me know that my presentation was too difficult for you to wrap your head around so the next time I write I can take that into consideration in the case I feel concerned about capturing your audience. At any rate, there is a possibility that progress on tinkering with montecarlo models will provide some insight in a more "quantitative form" later on. No really cool results yet, I've only just begun to try and create a useful model on a specific trade and 12 hours later it just isn't there yet.

if you make money by this according to your assumptions

1. Purchase 1 1/1/2015 17 Calls for -$2.20
2. Sell 1 1/1/2014 17 Call for +$1.10
3. Purchase 1 1/1/2015 20 Call for -$1.25
= Net -$2.35. That is, -$235

then you will make money by doing the opposite according to your assumptions

1. sell 1 1/1/2015 17 Calls for -$2.20
2. buy 1 1/1/2014 17 Call for +$1.10
3. sell 1 1/1/2015 20 Call for -$1.25

so why not just not do both?


gtfo

On December 10 2012 18:16 2c0ntent wrote: yes I know, care to comment about something actually meaningful to the discussion between options strategies in this context bro? sry, short fuse. but I'm just not trying to hear about nerdy nit picky stuff in this blog because I've not actually presented a trade but a theoretical one in a world that doesn't contain rates. I should mention it in the original post. Thanks for reading, and thanks for mentioning it dude. BTW The real reason is that when you're comparing strategies with a heuristic to choose the one with the smallest net cash outlay (expense) AND very similar/the same durations, the meaningfulness of rates becomes much less. Plus cash or t bill collects maybe .01% interest right now and I don't believe in an economic risk free rate. You either have money or not, just like you either have exposure or not IMO.

lol, nit-picky yes, but still important I think and should not be overlooked. You are absolutely right in that there are no risk-free assets, but there are still some relatively safe fixed-income assets that earn an ok return (though I am starting to think that I should maybe start accumulating gold, silver and CHF if shit really hits the fan).

Anyways, maybe something more constructive then: I think you have a good point about having exposure to rare events/huge market moves. The problem though is that it is costly, since rare events are rare (duuuh). As you have understood, you will continously bleed money due to theta-decay and only make real money at one point, if something really unexpected happens. And those moves can take a while before they come (possibly more frequent in todays economic climate, but that is most certainly priced in). I recommend you to make some option model and play around with the price of the underlying and the volatility parameter, to see what happens to the option value of deep otm options (if you have not done so already).

As a sidenote, I would not recommend trying to find mis-priced options to anyone who has not got a few millions to invest in computer hardware and software, and if you have not got a team of PhD's in mathematics or physics on stand by (preferably Russian). He who tries to do it without, will lose to those who have those resources, and you'd better of trying to find other opportunites.

^^exact...profits come from mispricing

On December 11 2012 09:00 2c0ntent wrote: If you don't want to actually discuss the topic and you don't even know what's going on in the OP it'd be wise to just re-read before posting, or just leave the blog, or let me know that my presentation was too difficult for you to wrap your head around so the next time I write I can take that into consideration in the case I feel concerned about capturing your audience.

BTW julep how is that Masters in Quantitative Finance going?

This is ridiculous.

On December 10 2012 14:36 2c0ntent wrote: Show nested quote + On December 10 2012 12:38 thewh00sel wrote: Don't know much about options strategy but gold is much more stable than silver and is unlikely to have big spikes. I would personally look to silver as it has a lot more upside potential IMO I actually don't think commodities are nearly as stable as people believe. In this specific case especially, my Gold investment is denominated in Dollars: I cannot actually redeem gold from the ETFund. So my call option on the future price of Gold is also a call option on a weaker US Dollar (ignoring any change in gold's intrinsic value). My perspective is more of trying to capture exposure to unpredicted events -- because market prices, in my view, don't have nearly the predictive power that someone would have to assume the price does in order to make a purchase of Gold, or whatever asset, worthwhile. So I want to capture event-exposure more than I'm interested in predicting the price that people will put on Gold down the road. Options are the key here, because if I do own the Call Options I outlined in this post and over the next year gold spikes to $2500 an ounce, then returns to its current $1700, I can redeem the value of part of the trade (incl proft) and freeroll the gold price over the next following year. Taking profit from a stock on a rally hurts your investment's potential total Return on Investment because not only do you have 1/2 as many Shares of Stock but any further growth of the asset's price does not exhibit the characteristics of a convex pay off. Ie. if you profit take on a jump, then let the Stock trade ride and the Option trade ride, and the asset's price increases by 1.2x from that point, your option will generate a lot more money relative to your initial investment than the stock. Options don't get neutered as badly by profit-taking. Gold is a legitimately interesting topic in and of itself. And I actually am in the process of constructing a trade that uses some of what I've outlined in this post. I'm not done yet and am planning on making a whole blog about my Gold-Dollar bet and perhaps a lot more depending on when I decide this trade is in place. I'm wondering, if you had to hedge a bet on Gold, what sort of thing would you look to buy?

Why do you think gold will go up to $2500? That seems batshit fucking insane to me. I view the fiscal cliff as the cunt destroyer of gold. The American economy is only going to strengthen, not weaken. Why would it weaken? It will be stronger due to the panama canal expansion, which will allow the US to become the number one exporter of energy (nat gas, oil) for quite a few years. (This will eliminate the dependence on foreign energy, which will help strengthen the economy, yet again.) (The increased traffic at ports like Port of Houston will bring a lot more jobs.) There's also the serious amounts of policing action and war-funding we do. You remember what happened to those Hamas rockets that tried to land in Israel? They were shot down by American rockets launched from an American missile defense system. There's also biotech, digitech, and space tech. Gold will be getting fucked in the ass and going back down to it's real value. Only 10% of what's been mined is actually used for things such as electronics. 90% for bling.

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