Strategies if Comeau is right about the Dowgreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
Today the Dow finished at 11551.10, which again is below Jean Comeau's critical turning point of 11569.
Previous responders have remarked that it really doesn't matter if the Dow goes down because it's possible to make money either with the market going up or down.
Strictly speaking, they are correct however for most people this entails trading techniques most investors can't (or shouldn't) use. I counsel caution in before using them.
An option is a way to bet on the direction of a price move on an stock without having to actually own it. Buying an option gives you the right, but not the obligation, to exercise it for a specific stock at a fixed price, for a certain period of time. Options that last longer (or go further into the future before they expire) cost more then shorter term ones. All options at fixed at a certain, specific target price. For example, an option could be fixed at a strike price of say $100, $105, $110, and so on. Options with prices further away from being in the money (or near the actual stock price) tend to be cheaper, since the chances of ever being valuable become less. The main point is to realize that you do not own a share of stock, rather the right to acquire (or sell) that stock at a predetermined price, for a specific period of time. All options are considered "wasting" assets because of this time decay feature. Essentially, there are two main distinctions in options: puts and calls. A put gives the owner the right to sell or "put it to" someone else at a specific price, even if the current selling price is lower. A call is the opposite. With a call, the holder has the right to purchase stock at fixed price, even if the actual price is higher. Why would someone accept these risks and write an option? In exchange for the option, the writer is paid a premium and hopes that the purchaser is wrong about the stock's direction and the option expires unexercised. In that case he retains both the stock and the premium.
A way to remember the difference between a put and a call is to think of a telepone call. When you want to make a call, you pick UP the receiver (buy something). Or if you want to end the call (sell something) you PUT down the receiver.
Veteran traders will realize at once I have simplified how options work, but the purpose was to give a basic orientation. Puts and calls are also traded on commodities, and there are whole worlds of complex put/call combinations created for specific trading objectives.
My main point is that studies have shown that the investing typically loses trading options nearly 90% of the time! The people and firms that write options are some of the most market savvy and well funded traders. Option writing to them is a "blood sport" and the option buying public is the prey.
Selling stock short is even more risky, in that theoretically your potential losses are unlimited, if the market moves against you. To sell a stock short, your broker borrows the stock from another account holder and sells it on the open market. The net proceeds, after commission, is credited to your account. If the shorted stock drops in price, you can then go back to the market and buy back the shares and return them ("cover your shorts"), pocketing the difference. You again have to pay commission on the purchase. If the short rises in price, you can either sell the stock and pay the difference which represents the lost value, or add more cash to your account to make up the difference. On occasion, a buying panic results when not enough stock is available for shorts to cover their positions: a classic "short squeeze" develops.
My point is simply this. Option buying is risky. Nine times out of ten you will lose ALL of your money, and short selling is best left to professionals. It is unwise to risk more then a small percentage of your liquid wealth into options, say 5%? Can you really say that if you lose $5,000 on options it won't seriously effect your lifestyle and family? No, then stay away.
Incidentally, this is one of the reasons why I think that if Comeau is correct about a crash, it's really going to hurt a lot of people. Speculation on stocks has reached mania proportions, which rivals if not exceeds past bubbles. Some people are maxing out their credit cards and taking out mortgages on their homes and business' to become day traders and gamble on stocks.
The first strategy is simply to avoid the coming bloodbath. Just sell any current stocks and hold on to the cash. The conservative, frugel attitude of our grandparents was based on the harsh realitity of the results of the 1929 crash. Simply holding on to your money would have put you ahead of most people back then, so don't overlook the oblivous.
A possible secondary strategy, after you have safely secured your main assets, would be to buy a bear fund such as the Prudent Bear. That way one can avoid the direct liabilities of owning options and selling stock as outlined above, but still take advantage of any downward move in the stock market. But these funds require minimium account balances and you must have your account set up BEFORE the crash.
These comments are offered only as my opinions, and I do not want anyone to think that they are specific recommendations. Consult your stockbrokers, wife, lawyer or whoever else is in charge, but think for yourself. It's your money, and you are responsible for it to provide for you and yours. We might be entering some "interesting times" and I am afraid that a lot of people are going to lose a great deal.
Of course, Comeau could be totally and completely wrong, and any counter market move such as described above would result in losses. Your mileage may vary, so be careful and research it yourself.
-- Sure M. Hopeful (Hopeful@future.com), January 12, 2000
I'd sure like to know of Comeau is shorting the market.
-- justthinkin com (firstname.lastname@example.org), January 12, 2000.
"9 out of 10 option trades loose money." Could you cite a study or proof?
A better strategy for the average investor is covered call writing. This can be seen as insurance against a price decline in shares in your existing portfolio. EX: You own 100 shares of XYZ Inc trading at $100 per share. You offer your 100 shares of XYZ as collateral and initate a call option - you are creating the call be being the first to sell it. Continuing the example, you sell a May 105 call and are paid immediately. The amount you are paid is dependent on the strike price (105 in this example) vs the current selling price (100); the time premium for period between now and expiration of the call( at expiration the time premium equals zero); supply and demand; and volatility of the underlying stock. A Mar 105 would be out of the money meaning that the stock would have to be at least 105 for the call to be exercised and might sell for $3 which is mostly the time premium. You might also consider selling at the money (a 100 call) or in the money (a 95 call).
Most calls are traded by speculators prior to the expirartion date, they are subject to price fluctuation if dividends are paid during the open period. Most calls are not exercised (one broker told me 67% of options are never exercised but allowed to expire worthless).
If you own XYZ and sell a covered call for $5 you have a downside price protection of about $5 (less broker fees and taxes) and you get your money up front.
Not really crash protection but definetly a money making insurance for downside price movement.
-- Bill P (email@example.com), January 12, 2000.
Don Hays thinks yesterday was "the seminal day". Coincidence?
-- dinosaur (firstname.lastname@example.org), January 12, 2000.
"The first strategy is simply to avoid the coming bloodbath. Just sell any current stocks and hold on to the cash. The conservative, frugel attitude of our grandparents was based on the harsh realitity of the results of the 1929 crash. Simply holding on to your money would have put you ahead of most people back then, so don't overlook the oblivous. "
so don't overlook the oblivious. really clever pun
so don't overlook the obvious. Good advice
All kidding aside, Thank you for the article and the time it took to write.
-- Possible Impact (email@example.com), January 12, 2000.
It's true options are harder to manage and understand than buying and holding. But just shorting a stock is no riskier than buying and holding. When you short a stock, you "borrow" it at the current price and bet its price will drop. If the price goes up too much, you "cover" your short position by buying the stock at the higher price and replacing the stock you borrowed, losing the difference. It is no different than buying a stock and hoping the price will rise; it is simply the opposite bet. Your potential loss is only unlimited if you NEVER cover your short; in any case the broker will likely require you to cover if you get too deep in the hole.
If you have real faith the market will drop, for Y2K or other reasons, you should short stocks instead of buying them. Those of you who believe Y2K-delayed problems are an inevitability in triggereing broad financial calamity should be shorting this market like crazy--it is overbought anyway (in techs) and due for a fall already on its own (and possibly for technical reasons as well). This is not my personal investment advice; I'm just pointing out that buying and shorting are simply two perspectives on which way the stock will go.
-- Shorty; (firstname.lastname@example.org), January 12, 2000.
Oops; I forgot one scenario, which Hopeful thankfully pointed out. If you pick a REALLY popular stock, and it soars, it might go up so fast that all the shorts try to cover at once...werry, werry bad...
But if you are shorting that kind of stock, either make sure you are RIGHT about Y2K etc, or pick boring stocks to short.
-- Shorty; (email@example.com), January 12, 2000.
Someone questioned the 90-10 split in an answer to your post (I can't access the answer right now) but Hopeful is correct in the percentages. What I read into the answer is that the poster thought that 90 percent of all trades were losing trades. Not so. If you sell a stock short, someone else had to buy it long. ALL trades MUST equal 100&. You can't sell 70% and someone else just buy 50%. Someone has to have the other shares. It might be some brokerage house's holding account but SOMEBODY has to have them. Not so with options. 90% of all options expire worthless. That's not such a bad thing. I have dealt in both put and call options for the last 11 years for my personal account. A lot of times I've bought an option just to cover something I'm doing with a stock. Sometimes if I'm not real confident about a stock's potential but I see a possibilty of good returns (40-70%) over a short period of time, I will buy an option just out of the money to protect myself in case the stock goes the other way.
Sometimes I know a stock is going to rocket off somewhere but I don't know if it's up or down (like TimeWarner) I might buy options in both directions. These moves are why most options expire worthless.
Commodity options and contracts are an entirely different game. In the commodity world, 80% of the people lose 95% of the money. However, it's the same zero sum game regarding the contracts. Those have to equal 100% at the end of the day.
Confused??? If so, DON'T PLAY THE GAME!! The big boys do NOT play nice.
-- Lobo (firstname.lastname@example.org), January 13, 2000.
dow just closed at 11583
-- alan (email@example.com), January 13, 2000.