Welcome to Wall Street, Main Street and Me

Friday, February 24, 2012

Romancing the Weekly Bull Puts and cheering for Options Animal (Wall Street)

My love affair with Options Animal and the weekly option bull puts continues!~ As long as the market continues in an uptrend, I am finding it a wonderful way to begin to recoup my losses and find my way back from a disastrous 2011.

I feel like I owe my entire trading career to Options Animal for their patient and wonderful classes, their coaches who have true teaching ethics, and their vision of making professional traders of their students, with independent minds and the capabilities to trade as one chooses--not some cooky-cutter, one size fits all, type of philosophy.

This is a tiny sample of Option Animal's "input" on the bull put. The clarity of their webinars is better than anything on the internet. Mind you, they do NOT teach us to use weekly options! They tend to feel they are too risky, so here is a prime example of a student taking their teaching and running with it on my own.

The way it works is: You SELL a Put option Out of the Money at a higher strike price than the Put option you BUY. (Ideally, the short option will be at the support level of your stock chart, and the long option will be one level below it). The difference between the premium you take in and the premium you pay out is a credit, and you keep it (the maximum reward) if the trade is successful.

The maximum loss is the difference in the short and long put strike prices, less the credit you take in.

The trade is successful IF the price of the underlying equity doesn't drop enough to "touch" your short put option by expiration. So, at the end of the week, if the equity has stayed stagnant or gone up, your short put is "safe" and you keep the moola.

The reasons I love this strategy.

1. With weekly options, you only have to wait one week to see if your trade is successful. I am an impatient person, so it suits my Type A. (most option trades can last a month or longer unless you day-trade).

2. You can trade a few different equities for 2 or 3 contracts on several different equities and still make $500 or $600 a week, without having to buy 20 or 30 contracts on one equity, thus risking 'the farm.'

3. For me, having a small fund, I don't like too much of my cash in play. With bull put spreads,(and all credit strategies) the broker "freezes" your maximum possible loss on each trade, to be sure you can pay. (They call it an "option requirement" on OptionsXpress.) I like this, as it puts a LOT of my cash out of play, thus automatically limiting my greed and willful ways. When the trade is over, that 'hold' is released, and the funds can then be used to trade again. The freeze on my cash annoys me, as I tend to be a cowboy trader, but in truth I am grateful that someone has some reins on me. And it gives me pause when I am calculating a trade and/or the number of contracts to buy.

For example, if I sell an Apple put with a strike price of $400 and buy an Apple put with a strike price of $350, the difference in strike prices is $50. $50 times 100 shares (per contract)=$500 per contract that my broker will "hold" until the trade is over. If I buy two contracts, it's $1000, etc. It makes a difference in managing your fund and how you want to trade.

Option trading is risky. Without education, it is financial suicide. But I can't think of one other thing I could do, sitting at my desk every day, at age (we won't discuss that right now) that could be more lucrative and fascinating. Exciting and challenging! My goal is to be a professional trader.


Tuesday, February 21, 2012

How To Get the Rich to Share the Marbles (Main Street)

February 20, 2012, 9:00 PM

How to Get the Rich to Share the Marbles

Source: http://www.flickr.com/photos/tupwanders/83092660/

Suppose scientists discovered a clump of neurons in the brain that, when stimulated, turned people into egalitarians. This would be good news for Democratic strategists and speechwriters, who could now get to work framing arguments about wealth and taxation in ways that might activate the relevant section of cerebral cortex.

This “share-the-spoils” button has been discovered, in a sense, but it may turn out to be harder to press than Democrats might think.

Pretend you’re a three-year-old, exploring an exciting new room full of toys. You and another child come up to a large machine that has some marbles inside, which you can see. There’s a rope running through the machine and the two ends of the rope hang out of the front, five feet apart. If you or your partner pulls on the rope alone, you just get more rope. But if you both pull at the same time, the rope dislodges some marbles, which you each get to keep. The marbles roll down a chute, and then they divide: one rolls into the cup in front of you, three roll into the cup in front of your partner.

This is the scenario created by developmental psychologists Michael Tomasello and Katharina Hamann at the Max Planck Institute in Leipzig, Germany. In this situation, where both kids have to pull for anyone to get marbles, the children equalize the wealth about 75% of the time, with hardly any conflict. Either the “rich” kid hands over one marble spontaneously or else the “poor” kid asks for one and his request is immediately granted.

But an experiment must have more than one condition, and the experimenters ran two other versions of the study to isolate the active ingredient. What had led to such high rates of sharing, given that three-year-olds are often quite reluctant to share new treasures? Children who took part in the second condition found that the marbles were already waiting for them in the cups when they first walked up to the machine. No work required.

In this condition, it’s finders-keepers. If you have the bad luck to place yourself in front of the cup with one marble, then your partner is very unlikely to offer you one, you’re unlikely to ask, and if you do ask, you’re likely to be rebuffed. Only about 5% of the time did any marbles change hands.

But here’s the most amazing condition — a slight variation that reveals a deep truth. Things start off just as in the first condition: you and your partner see two ropes hanging out of the machine. But as you start tugging it becomes clear that they are two separate ropes. You pull yours, and one marble rolls out into your cup. Your partner pulls the other rope, and is rewarded with three marbles. What happens next?

For the most part, it’s pullers-keepers. Even though you and your partner each did the same work (rope pulling) at more or less the same time, you both know that you didn’t really collaborate to produce the wealth. Only about 30% of the time did the kids work out an equal split. In other words, the “share-the-spoils” button is not pressed by the mere existence of inequality. It is pressed when two or more people collaborated to produce a gain. Once the button is pressed in both brains, both parties willingly and effortlessly share.

Tomasello has found that chimpanzees doing tasks similar to this one do not share the spoils, in any of the conditions. They just grab what they can, regardless of who did what. They don’t seem to keep track of who was on the team. Tomasello believes that the “share-the-spoils” response emerged at some point in the last half-million years, as humans began to forage and hunt cooperatively. Those who had the response could develop stable, ongoing partnerships. They worked together in small teams, which accomplished far more than individuals could on their own.

So now let’s look at a key line in President Obama’s State of the Union address: “we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.” The president is making three arguments about fairness in this one sentence, but do any of them press the “share-the-spoils” button? If you think that the economy is like a giant marble dispenser with a single rope, then you’d probably agree that if everyone does their “fair share” and pulls on the rope as hard as they can, then everyone is entitled to a “fair share” in the nation’s wealth. But do Americans perceive the economy as a giant collaborative project?

My parents were teenagers in New York City during the Second World War. The home front really was a vast and sustained communal pull. My mother remembers saving up nickels and dimes to buy a war bond. She lingered by her aunts and uncles, waiting for them to finish packs of cigarettes, so that she could grab the foil wrappers for the aluminum recycling campaign.

My parents were part of the generation that went through the depression, a world war, and then the cold war together. This generation accepted federal controls on wages during the war as being necessary for the common good. In the years after the war, the combination of high taxes on top earners, social norms against exorbitant pay, and an increasingly sturdy safety net brought income inequality down from a peak in 1929 to a long valley from the 1950s through the 1970s. It’s a period known as “the great compression.”

The compression went into reverse in the 1980s, and since then, inequality has risen to levels approaching those of 1929. Democrats have long sounded the alarm about rising inequality, but for decades they got little traction among the electorate. It’s only in the last few months, since Occupy Wall Street popularized the concept of the 1 percent, and since we all learned that Mitt Romney pays less than 14% in federal taxes, that the nation’s attention has been focused on the earnings of the super-rich. Will the Democrats’ new emphasis on fairness be enough to rally the nation to raise the top tax rates? Will Obama’s new progressivism press the right moral buttons?

America is in deep fiscal trouble, and things are going to get far worse when the baby boomers retire. Normally, when a nation faces a threat to its very survival, a leader can press the shared-sacrifice button. Churchill offered Britons nothing but “blood, toil, tears and sweat.” John F. Kennedy asked us all to “bear the burden of a long twilight struggle” against communism. These were grand national projects, and everyone was asked to pitch in.

Unfortunately, President Obama promised he would not raise taxes on anyone but the rich. He and other Democrats have also vowed to “protect seniors” from cuts, even though seniors receive the vast majority of entitlement dollars. The president is therefore in the unenviable position of arguing that we’re in big trouble and so a small percentage of people will have to give more, but most people will be protected from sacrifice. This appeal misses the shared-sacrifice button completely. It also fails to push the share-the-spoils button. When people feel that they’re all pulling on different ropes, they don’t feel entitled to a share of other people’s wealth, even when that wealth was acquired by luck.

If the Democrats really want to get moral psychology working for them, I suggest that they focus less on distributive fairness — which is about whether everyone got what they deserved — and more on procedural fairness—which is about whether honest, open and impartial procedures were used to decide who got what. If there’s a problem with the ultra-rich, it’s not that they have too much wealth, it’s that they bought laws that made it easy for them to gain and keep so much more wealth in recent decades.

Sarah Palin gave a speech last September lambasting “crony capitalism,” which she defined as “the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys.” I think that she was on to something and that she was right to include big government along with big business and big finance. The problem isn’t that some kids have many more marbles than others. The problem is that some kids are in cahoots with the experimenters. They get to rig the marble machine before the rest of us have a chance to play with it.

Jonathan Haidt is a professor of psychology at the University of Virginia and a visiting professor at the N.Y.U.-Stern School of Business. He is the author of “The Righteous Mind: Why Good People are Divided by Politics and Religion.”

The research reported on in this article was published in 2011 in Nature, 476, p. 328-331. (Hamann, K., Warneken, F., Greenberg, J. R., & Tomasello, M. Collaboration encourages equal sharing in children but not in chimpanzees.)


Thursday, February 9, 2012

The marvelous Bull Put Spread (Wall Street)

Well I do believe I've finally fallen in love with a strategy that serves my immediate purposes. I do not have a large fund, and it takes money to make money, you might have heard? But this seems a sure and steady income as long as we're in a bull market.

First of all, we ARE in a bull market, so a bull put spread is certainly "trading the trend."

A Bull Put is a credit spread--and that means that you SELL a Put at a higher strike price, and BUY a Put at a lower strike price. The difference in the premium of these two option contracts is a credit, (income, not expense!) thus money comes straight into your account. Itis an income strategy.

So say Apple is at $486. (and this morning, it happens to be.)

I SELL a Put at the $460 Strike price for $1.55 (per contract)
Then I BUY a Put at the $455 Strike price for $1.04 (per contract)

This puts the difference ($1.55 minus $1.04) of $.51 (times 100 shares) $51.00 (times number of contracts =3) $153.00 directly into my fund.

These are weekly options, so I have 7 days until expiration. If the stock price
does NOT drop down to my short strike of $460, both options expire worthless and I keep the $153.00.

My maximum gain is $153. The maximum loss is the Difference between the Strike prices ($460 minus $455 = $5 x 100 = $500 per contract) less the credit received. So in the above example, My maximum loss is $500 x 3 contracts minus $153. That equals $1,347.00. If I divide my gain by my maximum loss, I would have a return of 11.35% if the trade is successful. Annualized it would be 591.82%!

The probability of this trade being successful (as computed by probability software in both Options Express and Trade Monster) is 84.78% Apple would have to drop from $486 to $460 in 7 days. Is it possible? Of course. Is it probable? Not so much.

Okay, so why do I like this trade? First of all, I am doing both an Apple trade and a Chipotle Mexican Grill trade every week. Looking to make $300 to $500 per week. That is what I need to supplement my income. This strategy is (so far) providing that income.

Secondly, in a credit trade, the broker "holds" a certain amount of cash as a guarantee against losses. That amount is the difference in the strike prices of the short put and long put. So in the above trade, 3 contracts x $500 is the amount the broker holds. $1500. is on hold, but it is my money until I lose it. So for me, with successful trades, this works as a safe place for my cash, since I would rather have more cash on hand than have it all invested at once in options. And as the cash grows, I can afford to trade more contracts.

And finally, it is simple and understandable. If you want to be risky, you get closer to the stock price. If you want to be conservative, you sell further away from the stock price (and make less premium).

If you have ample cash on hand (which I don't) you can play VERY conservatively, and just buy more contracts further OTM to increase the premium. Each contract means the broker will hold another $500 as insurance against loss.

Happy trading!~