Your mission Jim....

[money tree]

your mission Jim, should you decide to accept it, it to design a RISK-FREE system that generates a consistent profit.

Risk free means having nett zero exposure. It also means there is no market movement scenario that could cause the system to fail.

[wayneL]

Risk free eh?:sly:

[ears open]

[ghotib]

Well that's a worthwhile mission. Wish I was a Jim and had a clue where to start.

[money tree]

let me just say it certainly is possible.

you have to think long and hard.

Im not going to give away the system. Unless you understand a system, you cant make it work. And you dont deserve to be handed such a system on a plate.

[RichKid]

Not sure about being completely risk free but isn't that what options models and complex derivatives attempt- ie whether a stock goes up or down you make money by betting each way (Also didn't Black/Scholes try to come up with a model to iron out risk?). I've heard that you need strong trends (or volatility) in some direction for that to be profitable. I'd say there would be some degree of risk all the time. ie 'act of god' type occurrences.

The only real 'risk free' investment I know of are the triple AAA rated govt bonds. Have heard their rate of return referred to as the 'risk free' rate. It all depends on how much you want to make and how soon: more risk more profits?

[tech/a]

more risk more profits?


Err-------- NO! not necessarily so.

[RichKid]

more risk more profits?


Err-------- NO! not necessarily so.

True, depends on how you manage your money and your risk.

[DTM]

:2twocents

Put your money into a Bankwest account for 6% return per annum. I can't see any risks in this system... ;) ;)

[money tree]

6% sound good? what about if inflation rises to 6%? will it still be risk free?

richkid: "(Also didn't Black/Scholes try to come up with a model to iron out risk?)"

Black & Scholes invented a formula for calculating the value of an option. It was Scholes and Murton? who formed LTCM where they tried to eliminate risk. They failed because they used historical volatility levels for backtests. In 1998 there was higher volatility than ever before, and they lost $500m a day for days on end.

The mission was to eliminate risk. Derivatives are risk-limiting instruments. You are on the right track.

[DTM]

In a bull market:

1. Look for an uptreding share
2. Buy the underlying share
3. Buy atm put, sell atm call for a net credit.

If call is excercised, you lose the shares, keep the credit. Repeat the process again.

In a bear market:

1. Look for a down trending share
2. Buy the underlying share
3. buy atm puts and sell itm calls for a net credit.

If price goes up, deliver the shares, keep the credit. If the price drops, exercise the put options which should leave enough credit from call option sale for a credit.

I'm not sure if it works as I've just thought it up.

Just a thought. :2twocents

[money tree]

lots of risk there

think see-saw

[RichKid]

6% sound good? what about if inflation rises to 6%? will it still be risk free?
richkid: "(Also didn't Black/Scholes try to come up with a model to iron out risk?)"
Black & Scholes invented a formula for calculating the value of an option. It was Scholes and Murton? who formed LTCM where they tried to eliminate risk. They failed because they used historical volatility levels for backtests. In 1998 there was higher volatility than ever before, and they lost $500m a day for days on end.
The mission was to eliminate risk. Derivatives are risk-limiting instruments. You are on the right track.

Thanks for the clarification, I'm clearly not an expert on these things. As for cash mgmt ac returns- doesn't it go up with the cash rate (which in turn goes up with inflation)? I like INGDirect but BankWest may be just as good or better.

[RichKid]

lots of risk there

think see-saw

'See saw' reminds me of some derivatives strategy that looked like a see-saw on the graph. Is that what they call a straddle or a collar or is it different?? I'm in uncharted waters here so the options experts will have to chip in!

[money tree]

A + B = C + D

risk A + risk B = total risk + return

first problem is how to get A and B to equal zero. The second problem is how to avoid a -D when C is zero.

Both have solutions

[RodC]

0 + 0 = 0 + 0 ??????????

[DTM]

A + B = C + D

risk A + risk B = total risk + return

first problem is how to get A and B to equal zero. The second problem is how to avoid a -D when C is zero.

Both have solutions

Off the top of my head, Crashy had same sort of similar strategy(from looking at the formula). I think its called a butterfly. He would look for situations where news would be coming out that would move the share price. Basically like a straddle except using spreads by selling ITM options. I think it goes like this:

1. Selling ITM call and buying atm/otm call, (Net Credit)
2. Selling ITM put and buhying atm/otm put. (Net Credit)

When the price moved one way or the other, he would buy one of the short options and let the profit run on his long position.

I think this strategy is OK if you have the capital (shorting options require margin) or that the price doesn't bounce.

Sorry Crashy if I got it wrong.

;)

[money tree]

nice guess, but no cigar

the strategy must remain risk free at all times. No intervention is required regardless of market action.

[wayneL]

You can, on rare occasions, construct a credit butterfly which is risk free. But thats pretty rare, therefore not a consistent return.

How about a clue...like are we looking vertical? diagonal? horizontal?

All of the above?

None of the above? LOL

[DTM]

In a bull market:

1. Look for an uptreding share
2. Buy the underlying share
3. Buy atm put, sell atm call for a net credit.

If call is excercised, you lose the shares, keep the credit. Repeat the process again.

In a bear market:

1. Look for a down trending share
2. Buy the underlying share
3. buy atm puts and sell itm calls for a net credit.

If price goes up, deliver the shares, keep the credit. If the price drops, exercise the put options which should leave enough credit from call option sale for a credit.

I'm not sure if it works as I've just thought it up.

Just a thought. :2twocents

OK. This may simple but workable using one of the methods above using HHG shares an example.

1. Buy 30,000 HHG shares @ $1.65 for $49,500
2. Buy March 1.60 Put @ .05 X 30 contracts for $1,500
3. Sell the March 1.60 Call @ .14 X 30 contracts for $4,200
4. Net Credit received for option positions $2,700

Worst case scenario
Share price ends at 1.60 or less and call option not excercised. Your loss is limited to the 5 cents lost in the share price because you have the put option. Loss = $1.65 - $1.60 = -$1,500. Because you have received a net credit of $2,700 from the sale of the option, the net profit is $1,200 ($2,700 - $1,500) which equates to approximately 2.4% return.

Best case scenario
Share price ends above strike price and call options are excercised. Shares are delivered and you keep the credit received of $2,700 which equates to approximately 5.5%.

Since HHG options dates are every three months, you might be able to do it four times a year for a theoritcal return of 21% pa. Conditions have to be right for it but its do able.

Theoritcally on a best case scenario, you should be able to find shares that have monthly exercise prices and do the same, therefore, if you were exercised every month with an average of 5.5% return, your return would be 65% per annum without compounding.

Worst case scenario where you aren't exercised every month and share price drops, your return would 29% pa uncompounded.

Food for thought.

:bite: :bite: :bite:

Let me know what people think.

[DTM]

PS

I can't see any risks but the better traders out there should be able to point it out.

It might work well with Rozella's strategies to capture extra income from dividends.

:samurai:

Please tear it apart as it may help benefit other investors/traders.

[money tree]

well its a damn good effort, and it may even work on rare occasion, but it just doesnt sound right.

it would be great if the call sold for 14c and the put for 5, but its just not realistic in my experience. you will find the two prices much closer according to put/call parity theory.

The strategy is not suitable for div stripping because of the risks of exercise.

You have the skills to get there in the end. Question is, do you have the patience?

[wayneL]

OK. This may simple but workable using one of the methods above using HHG shares an example.

1. Buy 30,000 HHG shares @ $1.65 for $49,500
2. Buy March 1.60 Put @ .05 X 30 contracts for $1,500
3. Sell the March 1.60 Call @ .14 X 30 contracts for $4,200
4. Net Credit received for option positions $2,700

Worst case scenario
Share price ends at 1.60 or less and call option not excercised. Your loss is limited to the 5 cents lost in the share price because you have the put option. Loss = $1.65 - $1.60 = -$1,500. Because you have received a net credit of $2,700 from the sale of the option, the net profit is $1,200 ($2,700 - $1,500) which equates to approximately 2.4% return.

Best case scenario
Share price ends above strike price and call options are excercised. Shares are delivered and you keep the credit received of $2,700 which equates to approximately 5.5%.

Since HHG options dates are every three months, you might be able to do it four times a year for a theoritcal return of 21% pa. Conditions have to be right for it but its do able.

Theoritcally on a best case scenario, you should be able to find shares that have monthly exercise prices and do the same, therefore, if you were exercised every month with an average of 5.5% return, your return would be 65% per annum without compounding.

Worst case scenario where you aren't exercised every month and share price drops, your return would 29% pa uncompounded.

Food for thought.

:bite: :bite: :bite:

Let me know what people think.

This strategy is known as a conversion, or a locked position.

Nice if you can construct it at a credit....but are those option prices fillable or are they closing prices? You have a huge volatility skew there if so. Normally they are at a small debit including commisions and a credit is rarely achievable.

They are normally used, to lock in a profit or to hedge against adverse movement.

Cheers

[DTM]

well its a damn good effort, and it may even work on rare occasion, but it just doesnt sound right.

it would be great if the call sold for 14c and the put for 5, but its just not realistic in my experience. you will find the two prices much closer according to put/call parity theory.

The strategy is not suitable for div stripping because of the risks of exercise.

You have the skills to get there in the end. Question is, do you have the patience?

The prices were from today. I think that generally, you would find these kind of prices when a stock is moving up and has just gone past a strike price. You would have to have patience and you have to look for the right priced stock, ie between $1 to $5.

I think that realistically, you could do it at least 6 times a year without too much effort, and if you had 50k to use, it would make a nice return, even nicer with dividend capture. Pretty much like a covered call except you're wanting to be exercised.

If some one runs with it, give us your feed back. I mostly wouldn't use this as I'm mostly a directional options trader with better returns.

Cheers.

:drink:

[money tree]

yes wayne is right. It is an old strategy and has other names such as "protected portfolio" or "collar"

If there were a net credit available, it would be spotted and arbitraged quickly, thus closing the gap.


lets say this method does work. Do you stop searching at this point or try to find something better?

Every time I think I have found the best result possible, it is superceeded within a month. My current strategy returns 187% p.a. with zero risk. The previous strategy ran at +51% with zero risk.

[DTM]

This strategy is known as a conversion, or a locked position.

Nice if you can construct it at a credit....but are those option prices fillable or are they closing prices? You have a huge volatility skew there if so. Normally they are at a small debit including commisions and a credit is rarely achievable.

They are normally used, to lock in a profit or to hedge against adverse movement.

Cheers

Hi Wayne,

These options were prices were filled and are liquid.

I read Rozella's thread with interest because she has a clear strategy and it's always interesting to read. I note that she has bought into OST at 2.83. If we were to use this conversion method for the month of Feb with 30k or so, it would go like this.

1. Buy 10,000 OST shares @ $2.83 for $28,300.
2. Sell 10 contracts of the $2.75 Feb call for a credit of $1,450
3. Buy 10 contracts of the $2.75 Feb put for a debit of $ 400

A net credit of approx. $1,050 is collected.

Worst case scenario, price drops 8 cents to 2.75 or less and share loss would be limited to $1,050 less $800 = $200 profit due to the puts purchased hence only $200 of credit would be left.

Best case scenario would be the call options were exercised and you have $1,000 return or 3.5% return from a 3 week trade.

If Rozella was serious about the dividend capture, she would be looking at the May options. This is what it would look like from the prices that were traded today.

1 Buy 10,000 of the underlying OST stock @ 2.83 for $28,300
2 Sell 10 contracts of the $2.75 May call for a credit $ 2,000
3 Buy 10 contracts of the $2.75 May put for a debit $ 1,100

Net credit received would be $900.

Best case scenario.
Call options exercised before 22 March for a profit of $900 or 3% return.

Worst case scenario
Price of stock drops to $2.75 or less hence loss would be limited to $900 (credit received) less $800 (8 cents drop X 10,000 shares) hence your profit would approx be $100. This would also mean that you keep the shares and receive the 5 cents fully franked dividend ($500) if shares are kept past 22 March. Worst case scenario probably works out the same as best case scenario because of taxation reasons.

The downside to this is that it limits your upward potential, but the upside means that it doesn't have a downside risk.

Now that we've finished talking about small change..., :2twocents

Money Tree, how about you stop teasing us and show us how to take the risk out of making 100% plus per annum!!! :D :D :D

[DTM]

well its a damn good effort, and it may even work on rare occasion, but it just doesnt sound right.

it would be great if the call sold for 14c and the put for 5, but its just not realistic in my experience. you will find the two prices much closer according to put/call parity theory.

The strategy is not suitable for div stripping because of the risks of exercise.

You have the skills to get there in the end. Question is, do you have the patience?

PS The call options are deep in the money whereas the put options are out of the money, hence a net credit would be received. ;)

[wayneL]

DT,

I was using the wrong terminology: credit is not correct. Because you are buying shares, the strategy will always be at a debit.

But because the strategy is a locked strategy it will always be a locked profit or loss, save for early exersize.

I am having trouble believing those prices are fillable simultaneosly. The arb boys would be in like a flash and I can't believe the RTs would leave a hole like that open.

Payoff diagram below (at theoretically equal IVs)

[wayneL]

ROTFLMAO

I am getting some interesting looking payoff diagrams trying to work this out!

Also some useful LOW risk strategies I would never have thought of otherwise.

No cigar for zero risk yet.

Cheers

[DTM]

Wayne

What software are you using? Looks interesting. Need to get me some of that. :1luvu:

[wayneL]

Wayne

What software are you using? Looks interesting. Need to get me some of that. :1luvu:

http://www.hoadley.net/options

basic version (what you see) is free, you can buy various add on functions, but theses are quite cheap.

I never make a trade without it.

[wayneL]

This will take you to straight to the free strategy modeller

http://www.hoadley.net/options/strategymodel.htm

[DTM]

This will take you to straight to the free strategy modeller

http://www.hoadley.net/options/strategymodel.htm

Thanks Wayne. :bigthumb:

[positivecashflow]

Hi DTM,


I thought you use OptionGear for your options risk graphs etc...

[DTM]

Hi DTM,


I thought you use OptionGear for your options risk graphs etc...

Hi Posi

I normally work out the risk graph in my mind. I actually haven't used optiongear graphs very much as I mostly use t/a for working out where to buy. Options that are cheap are easy to spot but you have to be patient or be in the right place at the right time to get them. Other times you have to buy straight away at market price as the expected market move may take the price out of your range. If it moves before I get a chance to buy than I will let it go as I normally don't chase it (as a policy).

[DTM]

your mission Jim, should you decide to accept it, it to design a RISK-FREE system that generates a consistent profit.

Risk free means having nett zero exposure. It also means there is no market movement scenario that could cause the system to fail.

OK Money Tree..... We give up. :dunno: :dunno: :dunno:


How do you place options trades with no risk, no market intervention for 158% return pa????

[DTM]

OK Money Tree..... We give up. :dunno: :dunno: :dunno:


How do you place options trades with no risk, no market intervention for 158% return pa????

Oops. Sorry, 188%.

[money tree]

let me just say it certainly is possible.

you have to think long and hard.

Im not going to give away the system. Unless you understand a system, you cant make it work. And you dont deserve to be handed such a system on a plate.

Im quite happy to comment on whatever you come up with, even steer you in the right direction. But Im not giving away my system just because you give up....

[DTM]

Can you give us a clue?

Does it involve shares?

[money tree]

Clues thus far:

"Risk free means having nett zero exposure. It also means there is no market movement scenario that could cause the system to fail."

"Put your money into a Bankwest account for 6% return per annum. I can't see any risks in this system"

"think see-saw"

"The mission was to eliminate risk. Derivatives are risk-limiting instruments. You are on the right track."

"A + B = C + D

risk A + risk B = total risk + return

first problem is how to get A plus B to equal zero. The second problem is how to avoid a -D when C is zero."

"The strategy is not suitable for div stripping because of the risks of exercise."

[The Barbarian Investor]

nice guess, but no cigar

the strategy must remain risk free at all times. No intervention is required regardless of market action.

No intervention "regardless" of Market Action ???

:goodnight No Idea??? I'll leave it to more experienced and better minds than mine to figure this one out!!

[JetDollars]

Money Tree,

I alway believe that if you invest then you will be expose to some sort of risk.

Therefore, there are no risk free return in the stocks/options....market.

Please proof me wrong.....

[DTM]

Clues thus far:

"Risk free means having nett zero exposure. It also means there is no market movement scenario that could cause the system to fail."

"Put your money into a Bankwest account for 6% return per annum. I can't see any risks in this system"

"think see-saw"

"The mission was to eliminate risk. Derivatives are risk-limiting instruments. You are on the right track."

"A + B = C + D

risk A + risk B = total risk + return

first problem is how to get A plus B to equal zero. The second problem is how to avoid a -D when C is zero."

"The strategy is not suitable for div stripping because of the risks of exercise."

Money Tree

Apologies in advance as I won't be able to follow this thread for the next few weeks. I'm off to New York for the Traders convention starting this week and won't be able to post. This thread has been interesting and I hope our fellow forumites received some benefit from it.

I think I have worked out your method as your formula basically gives it away. I will try and better the returns and will post the results. I will test it next month with my lemon Telstra shares I received many years ago (I knew they would be usefull one day).

Thanks again Money Tree for making us think and hope everyone manages to work out a risk free system.

Until then, happy trading and hope you've got a tax problem. :) ;) :)

[money tree]

Therefore, there are no risk free return in the stocks/options....market.

Please proof me wrong.....

I said something similar once. Walked into KFC and said "Colonel Sanders, you dont really use 11 secret herbs & spices. Please prove me wrong"

[SuperTed]

Jet tis way to early in the game to play the "reverse" card....and such a blatant one at that. ;-)

Going with the theme..........the only 0 risk trade that Im aware of is the "free trade". The free trade however started life carrying risk.

Money Tree does your trade involve synthetics?

The best ideas are often the simple ones butttttttt ;-)

[Mofra]

Money tree,

Thanks for getting the synapses grinding away, I'm thinking at the moment risk A & B = rising or falling underlying instrument price respectively, and with a return of 188% pa you must be leveraging the underlying instrument (if applicable).

Wih DTMs examples before I would've calculated (with the exercised scenarios) the loss on exercise (delivering on the contract at below the purchase price) in my calculations, giving my after exercise figures of $800 for the HHG example, $250 & $100 for the OST examples.

I haven't made the assumption that a zero net exposure = a delta of 0 as I don't want to limit possibilities just yet.

Just hoping to this doesn't keep me up at night thinking :banghead:
Ta,


Mofra

[Mofra]

Money Tree,

One direct question:

Is normal time value on the options an important part of your strategy, ie. without the time value the strategy doesn't work?

Thanks in advance, I have something but the application of what I have certainly looks longer than the simple A + B = C + D clue

[money tree]

Time value actually is a negative. The strategy would be a lot more profitable if time decay was on my side. But the risk becomes unbearable when time decay is the main goal.

[SuperTed]

Time value actually is a negative. The strategy would be a lot more profitable if time decay was on my side. But the risk becomes unbearable when time decay is the main goal.

So youre a "buyer" of options

[money tree]

someone emailed me a strategy. I thought better to reply here:

that may work, but its nowhere near either of my strategies. I have 2 risk free strategies. one has nothing to do with stocks or options at all. that will make your head spin im sure. the option strategy is included in my course, but it was incomplete because I never give away my best strategy until I top it with another. I did that, so I gave away some clues so that only my students could put 2 and 2 together. but i guess there arent any on the forum, or they dont get it, or they did and dont want to tell everyone.

A good understanding of ACH rules will help. The strategy has a few defence mechanisms. ie, at first glance it looks like a loser but it does work. but many option traders dont know all the calculations involved, and simply discard the idea at the first hurdle.

it took me 2 years to get there, and even with clues I wont be surprised if nobody else does. I do know however that one of my students entered this trade a few months ago, and thats without all the clues. I know this because I saw the trade go through, not because they told me. Its possible that someone developed the same strategy by coincedence, but since I have not seen this trade carried out in the 6 months since I thought of the strategy, I very much doubt it. theres some more clues right there.

cheers :)

[DTM]

someone emailed me a strategy. I thought better to reply here:

that may work, but its nowhere near either of my strategies. I have 2 risk free strategies. one has nothing to do with stocks or options at all. that will make your head spin im sure. the option strategy is included in my course, but it was incomplete because I never give away my best strategy until I top it with another. I did that, so I gave away some clues so that only my students could put 2 and 2 together. but i guess there arent any on the forum, or they dont get it, or they did and dont want to tell everyone.

A good understanding of ACH rules will help. The strategy has a few defence mechanisms. ie, at first glance it looks like a loser but it does work. but many option traders dont know all the calculations involved, and simply discard the idea at the first hurdle.

it took me 2 years to get there, and even with clues I wont be surprised if nobody else does. I do know however that one of my students entered this trade a few months ago, and thats without all the clues. I know this because I saw the trade go through, not because they told me. Its possible that someone developed the same strategy by coincedence, but since I have not seen this trade carried out in the 6 months since I thought of the strategy, I very much doubt it. theres some more clues right there.

cheers :)

Money Tree, good to see you bring this back up in discussion. I haven't had time to look at it properly as the resource wave has been keeping me busy. I will try and put the thinking cap on as this is an excellent mental exercise which will only help my trading. Maybe all af option traders should try to figure out too. Even if you don't figure it out, you can still learn a lot by having a go at it.

Keep up the good posts. :)

[wayneL]

someone emailed me a strategy. I thought better to reply here:

that may work, but its nowhere near either of my strategies. I have 2 risk free strategies. one has nothing to do with stocks or options at all. that will make your head spin im sure. the option strategy is included in my course, but it was incomplete because I never give away my best strategy until I top it with another. I did that, so I gave away some clues so that only my students could put 2 and 2 together. but i guess there arent any on the forum, or they dont get it, or they did and dont want to tell everyone.

A good understanding of ACH rules will help. The strategy has a few defence mechanisms. ie, at first glance it looks like a loser but it does work. but many option traders dont know all the calculations involved, and simply discard the idea at the first hurdle.

it took me 2 years to get there, and even with clues I wont be surprised if nobody else does. I do know however that one of my students entered this trade a few months ago, and thats without all the clues. I know this because I saw the trade go through, not because they told me. Its possible that someone developed the same strategy by coincedence, but since I have not seen this trade carried out in the 6 months since I thought of the strategy, I very much doubt it. theres some more clues right there.

cheers :)

That was me who sent the email....drats....but I think it's a good strategy. Trying a couple of small positions to see.

ACH...do you mean OCH?

Cheers

[wayneL]

ACH/OCH

Ah! I see they,ve changed there name to Australian clearing house.

The US where I trade has different rules so I might not be able to duplicate your strategy even if I crack it.

Cheers

[money tree]

for those who emailed/messaged me about the course:

www.********.8k.com

[DTM]

someone emailed me a strategy. I thought better to reply here:

that may work, but its nowhere near either of my strategies. I have 2 risk free strategies. one has nothing to do with stocks or options at all. that will make your head spin im sure. the option strategy is included in my course, but it was incomplete because I never give away my best strategy until I top it with another. I did that, so I gave away some clues so that only my students could put 2 and 2 together. but i guess there arent any on the forum, or they dont get it, or they did and dont want to tell everyone.

A good understanding of ACH rules will help. The strategy has a few defence mechanisms. ie, at first glance it looks like a loser but it does work. but many option traders dont know all the calculations involved, and simply discard the idea at the first hurdle.

it took me 2 years to get there, and even with clues I wont be surprised if nobody else does. I do know however that one of my students entered this trade a few months ago, and thats without all the clues. I know this because I saw the trade go through, not because they told me. Its possible that someone developed the same strategy by coincedence, but since I have not seen this trade carried out in the 6 months since I thought of the strategy, I very much doubt it. theres some more clues right there.

cheers :)


wrote 20 XJO Jun05 4300.0 Call @ 63.0

Money tree,

I've just constructed a theoretical trade that looks risk free for now with a very nice credit premium. It looks very promising so far. This probably isn't what you're asking about but using your above trade details, I am able to keep at least most of the above premium (in theory). It takes a lot of margin to protect it but will have to try and work out the weaknesses and also the amount of capital required for margin.

How do you work out the percentage of profit if the trade is a net credit trade?

[money tree]

those xjo calls I wrote is a direction pick and definately not a risk free trade. hope nobody thinks that.

"How do you work out the percentage of profit if the trade is a net credit trade?" "It takes a lot of margin to protect it..."

so its a written position with a net credit. but then risk margin kicks in. still a credit? if its risk free, wouldnt risk margin be zero?

well DTM, I do believe you are nearly there.

[DTM]

those xjo calls I wrote is a direction pick and definately not a risk free trade. hope nobody thinks that.

"How do you work out the percentage of profit if the trade is a net credit trade?" "It takes a lot of margin to protect it..."

so its a written position with a net credit. but then risk margin kicks in. still a credit? if its risk free, wouldnt risk margin be zero?

well DTM, I do believe you are nearly there.

Risk margin is zero, but what I meant was you would have to have a lot of capital for margin requirements. A lot more than what I use. My knowledge for margin requirements are limited so I will have to actually do some homework to find out more.

[money tree]

congratulations.

you are at the first of 3 hurdles.

[DTM]

congratulations.

you are at the first of 3 hurdles.

I can't even get over the lack of capital hurdle to begin with... :(


But my normal trading has better returns :D although immensely enjoyed the mental exercise. ;)

Just out of curiosity, are the hurdles strategic or rules based? :confused: Those mental exercises were hard enough, more thinking than what I'm used to and don't really want to over exert myself again unless the challenge hasn't been met.

Daniel

[money tree]

"But my normal trading has better returns.."

normal trading aka taking big risks and spending many hours researching, charting, lost sleep, stress, watching screens...... :eek:

then theres passive cashflow from risk free investing. no risks, little time involved, no lost sleep, plenty of time to work or travel the world (which I plan to do shortly) and returns are stable and consistent. :D

:banghead:

"...are the hurdles strategic or rules based?"

2 strategic, 1 rules

[DTM]

"But my normal trading has better returns.."

normal trading aka taking big risks and spending many hours researching, charting, lost sleep, stress, watching screens......

then theres passive cashflow from risk free investing. no risks, little time involved, no lost sleep, plenty of time to work or travel the world (which I plan to do shortly) and returns are stable and consistent.

:banghead:

"...are the hurdles strategic or rules based?"

2 strategic, 1 rules


Very good point Money tree. :bigthumb:


Day trading does get boring after a while, and that travelling round the world while you're making money sounds too good to be true. :bandit: Drinking magherita's on the pacific coast of mexico while making money is the way to go.


When I get enough money behind me, I will really have to think hard... :(

[Mofra]

DTM,

I really hope this little observation isn't leading you down the wrong path, however:


Clues thus far:

"Put your money into a Bankwest account for 6% return per annum. I can't see any risks in this system"


Hmmmmm... if TIMS only calulates the net risk after taking into account all option positions and some money market securities are acceptable for use as a margin;
a. you may be able to reduce your margin requirements below that of a simple covered call
b. the interest earned from a deposit security could be added to risk-reducing factors in your equation

Moneytree feel free to correct and/or ensure I'm not getting sidetracked :confused:

Haven't thought about this for a couple of weeks but it's not the sort of conundrum that I can resist coming back to.

Cheers

[money tree]

excellent work Mofra

:D

2 hurdles overcome. One remaining. Blame your broker.

[SuperTed]

Side note on the "blame yr broker" quote * I have no broker margins for writing uncovered options only OCH margins. The old days when i had to have 20% broker margins as well as OCH are long gone ;-) There are a few brokers out thier that will do this. OCh has a list of accepted securties

[knit 1 pearl 2]

is it any thing to do with dividends

and r u also spruiking your course here?

[money tree]

error

1 hurdle beaten. 2 remain, though Ted beat one. Which broker Ted? I asked a while ago about brokers doing OCH + 0% and nobody responded. Comsec wants 50%, Avcol 30%, Sanford 1000% lol......

[SuperTed]

Mine is a small/large firm.

Commsec isnt to bad as it is only 1.5x OCH margins (thats including OCH as far as im aware).

Depends how close to the money you want to go. The Sanford 50% cash cover of total value +OCH is a joke for that matter so is Etrade 100%...(lol i would need 2 million in cash reserves ;-) instead of sometimes 50k.

[money tree]

"a small/large firm" named?

[SuperTed]

LoL 1 done, 2 to go.

I pm'd you the firm money.

But to help others most smaller firms the brokers themselves carry the risk as they work for themselves. They give a % of the brokerage they earn as rent ;-) (if you wanna look at it like that).

Depends on the broker but look at smaller full service firms not discount or large brokerages which normally have more rules.

I pay 30% more for brokerage now compared to what i used to pay with TDwaterhouse but it easily makes up for it by not having to have 20% cash cover + OCH

[SuperTed]

error

I asked a while ago about brokers doing OCH + 0% and nobody responded. Comsec wants 50%, Avcol 30%, Sanford 1000% lol......

Mustnt have seen it, i did do several posts on this topic at reefcap...but stopped as i got bored talking to myself over there ;-)

This is from the asx seems quite old but lists accredited option firms

http://www.asx.com.au/investor/pdf/OptionsAdvisers.pdf

[Synapse]

Hi,

Here are two different ways to create a risk-free trade involving options, which in both cases will definitely return some form of profit (albeit a fairly small actual amount, but still a profit none-the-less).

1. Buy yourself some stock, then sell a long dated (say 12 months until Expiry) at-the-money Call & Buy an at-the-money Put (also 12 months until Expiry). Due to the inclusions of the "risk free" interest rate in the Option Premium calculations, you'll roughly net the equivalent return as the risk free rate over the course of the 12 months, irregardless of what the underlying stock price does. For example, assuming stock XYZ is $20.00 with IV=30%, here are is an example trade:
Buy 1,000 x XYZ Shares @ $20.00
Sell 1 x XYZ $20.00 Call Option @ 289c
Buy 1 x XYZ $20.00 Put Option @ 194c

Net result = 95c profit based on these premiums, which is a guaranteed 5% (approx) return on your investment no matter what happens (although you may need to manage the trade if the sold Calls are in-the-money approaching an ex-dividend date to avoid early exercise. This wouldn't be a problem unless the share did something weird on the actual ex-dividend date, thus messing up the value of your bought Put option).


2. This is a little more complex, but should work fine: Assume stock XYZ is $20.00 with IV=30%. Place following trade, again using 12 month Options:
Sell $20.00 Call @ 289c
Buy $20.50 Call @ 266c
Sell $20.50 Put @ 220c
Buy $20.00 Put @ 194c

Net Result = 49c Credit (i.e. $490.00 per set of contracts), however cost to close will always be 50c (i.e., $500.00). This results in a $10.00 loss per set of contracts. However, being tricky traders who know how the ACH works, we'd structure things in one of the following ways:

(a) Simply leave the full net credit received plus provide $10.00 per set of contracts as security with our Broker, knowing that if we use someone like "Avcol Stockbroking" they'll pay interest at around 5% per annum on our funds even while they are tied up acting as margin cover! This means we've returned about $25.00 in interest after the year, therefore we're about $15.00 in front even after paying the small extra amount to close the position (ignoring brokerage/fees); OR

(b) If we are currently owning shares we could lodge our shareholdings as security for this option position, and use the net credit received to invest at the risk-free cash rate of 5.5% to earn about $27.00 in interest over the 12 months. Once again, this more than makes up for the $10.00 loss we know we are faced with when closing the trade.

Obviously, you'd need to do a large number of contracts to ensure you cover the Brokerage costs and ACH fees. Furthermore, I'd suggest using European style Options so that you know for sure you cannot be Exercised prior to the Expiry Date. Using XJO index options would be perfect as an example. :)

I trust you'll find this a useful answer to your challenge! ;)


Jason.


P.S. Would anyone like to calculate the actual % return you are really earning on your invested funds (i.e. $10.00 per set of contracts) in scenario 2 above?? You might be in for a surprise! :eek:

[money tree]

getting real close now.

a few more clues given also...

there may be 100 different 'risk-free' trades. I thought of another since starting this thread.

goes like this:

long dated, deep itm puts have negative time premium. buy an xjo dec 6000 put, write june atm puts. when they expire, write sept. when they expire sell the dec. you get paid for holding the dec put, since time value is negative. you sell time value 3x and no intrinsic value and there is no long term risk. you could buy a longer dated put and write more shorter puts to boost the return.

[positivecashflow]

When you initiate the trade it's not exactly risk free... You risk the initial debit paid... As you roll each expiry of the short put then yes you reduce the risk as you collect the premium.

[wayneL]

Hi,


2. This is a little more complex, but should work fine: Assume stock XYZ is $20.00 with IV=30%. Place following trade, again using 12 month Options:
Sell $20.00 Call @ 289c
Buy $20.50 Call @ 266c
Sell $20.50 Put @ 220c
Buy $20.00 Put @ 194c

Net Result = 49c Credit (i.e. $490.00 per set of contracts), however cost to close will always be 50c (i.e., $500.00). This results in a $10.00 loss per set of contracts. However, being tricky traders who know how the ACH works, we'd structure things in one of the following ways:



Why not go way away from the money with the box spread...like:

Sell $25.00 Call @ 84c
Buy $15.00 Call @ 5860c
Sell $15.00 Put @ 22c
Buy $25.00 Put @ 5180c

and get a credit of around $10.00...interest on $10k @ 5% being $500

[Synapse]

Why not go way away from the money with the box spread...like:

Sell $25.00 Call @ 84c
Buy $15.00 Call @ 5860c
Sell $15.00 Put @ 22c
Buy $25.00 Put @ 5180c

and get a credit of around $10.00...interest on $10k @ 5% being $500

Hi Wayne,

There would definitely be numerous variations as to which strike prices you could use when placing a box spread such as this. Please note that your example trade results in a net debit as you've described it and this would be a guaranteed losing trade based on those premiums. On the other hand it'd be a guaranteed winner if you swapped the long and short legs and did set it up for a massive > $10 net credit. By the way, I can't seem to replicate the premiums you've used - which pricing model are you using? Also, what IV, time until expiry and risk free rate did you use to generate those figures? Did you incorporate some form of dividend payment(s) into the pricing calculation?

To answer your question, the further away from the money you go, the more difficult the trade would be to place at any kind of fair premium value and furthermore you'd be up for more brokerage as the total dollar value of all 4 x legs would increase. This is no reason not to explore the possibilities, though... ;)

My comments were meant more as food for thought and just one way of making something fit to the parameters that money tree had originally stated. I acknowledge that there will be many better approaches - indeed I found two other more efficient combinations of Options to achieve a better potential return within minutes finishing writing my other post. :)

I'd like to encourage us all to brainstorm more on this and see what we can come up with... Creating trades which will lock-in a predetermined profit, irregardless of the future movement in the underlying share price, would certainly be worth exploiting whenever possible! :D

Would anyone else like to add their comments/thoughts, in particular about setting up a 12 month long trade for a net credit and earning interest on the funds received?


Jason.

[wayneL]

Hi Wayne,

There would definitely be numerous variations as to which strike prices you could use when placing a box spread such as this. Please note that your example trade results in a net debit as you've described it and this would be a guaranteed losing trade based on those premiums. On the other hand it'd be a guaranteed winner if you swapped the long and short legs and did set it up for a massive > $10 net credit. By the way, I can't seem to replicate the premiums you've used - which pricing model are you using? Also, what IV, time until expiry and risk free rate did you use to generate those figures? Did you incorporate some form of dividend payment(s) into the pricing calculation?

To answer your question, the further away from the money you go, the more difficult the trade would be to place at any kind of fair premium value and furthermore you'd be up for more brokerage as the total dollar value of all 4 x legs would increase. This is no reason not to explore the possibilities, though... ;)

My comments were meant more as food for thought and just one way of making something fit to the parameters that money tree had originally stated. I acknowledge that there will be many better approaches - indeed I found two other more efficient combinations of Options to achieve a better potential return within minutes finishing writing my other post. :)

I'd like to encourage us all to brainstorm more on this and see what we can come up with... Creating trades which will lock-in a predetermined profit, irregardless of the future movement in the underlying share price, would certainly be worth exploiting whenever possible! :D

Would anyone else like to add their comments/thoughts, in particular about setting up a 12 month long trade for a net credit and earning interest on the funds received?


Jason.

OOPS ...an error in transposing

Should be:

BUY $25.00 Call
SELL $15.00 Call
BUY $15.00 Put
SELL $25.00 Put

....to get a ~$10.00 credit

Your other comments really highlight the difference between the Aussie and US options markets

In the US, fair premium is available that far away from the money, often at zero skew. In fact strikes are at $2.50 intervals at this level, rather than the 50c intervals here.

Also commission is charged on a "per contract" basis, negating the concern of high commissions on net contract value.

Margins on verticals are also different.

>>>"My comments were meant more as food for thought and just one way of making something fit to the parameters that money tree had originally stated. "<<<<

That's what we're all doing on this thread. ;)

[SuperTed]

In the US, fair premium is available that far away from the money, often at zero skew.


Think i need to start trading over there. The "market makers" really screw the OTM series here and have no concept of "fair" price

[wayneL]

Think i need to start trading over there. The "market makers" really screw the OTM series here and have no concept of "fair" price

Well the US MM's aren't exactly your fairy godmother. But they're kept a lot more honest by the number of players in most markets and aren't so openly larcenous. You also have a higher chance of an actual trader being on the other end of the trade.

You can also trade any spread...even custom spreads...online....even naked calls if you want, all at $1 per contract thru IB.

That said, I could never go back to the ASX.

[kaveman]

had a quick look through this thread after it was mentioned elsewhere.
It seems that you sell an option while buying others etc to make a risk free trade?
Does writing an option automatically mean it will get bought by someone? If no then is this not a risk, or do you not buy the other options until yours has been sold.

[Mofra]

had a quick look through this thread after it was mentioned elsewhere.
It seems that you sell an option while buying others etc to make a risk free trade?
Firstly, thanks for bringing the post up again. Completely forgot about this mental exercise. We are attempting to figure out some risk free trades - obviously the pros doing it better than part-timers like myself


Does writing an option automatically mean it will get bought by someone?
Yes, your sale needs to be matched by a buyer for the trade to open

[kaveman]

Yes, your sale needs to be matched by a buyer for the trade to open
thanks so the answer would be "no" it is not automatic. Writing an option only gets taken if you have a buyer at the price you want.

[Mofra]

“Yes” should have read “No” apologies kaveman – at least you got what I was trying to say.

Now back to the fun: from the clues I’ve gathered that we need a net credit position, time decay is not a factor in strategy, and stock shouldn’t be used as margin if 188% return is a target.

Assuming IV of 30% & 5.5% interest rate, 30 days to expiry & ignoring dividends:

Stock XYZ - last price $20

Sell $18 Call $2.16
Sell $22 Put $2.07
Buy $19 Call $1.35
Buy $21 Put $1.26

Net Credit $1.62 - Exercise can be covered by both long call & put regardless of share price movement -EXCEPT when price finished between short & long gaps (ie between $18 & $19 for the calls, and $21 & $22 for the puts)

In these cases at the expiry date only the intrinsic values should be req’d to buyback open positions (+1c for the greedy MMs?), being a maximum of $1 this leaves a minimum net credit of 62c at the end of the month minus brokerage and stamp duty. The positions are relatively covered so margin requirements should be reduced (TIMS only calculates the net risk after taking into account all option positions).

money tree or anyone else please feel free to pick apart any obvious flaws, this is the only strategy I could come up with without a net debit to begin with or an exercise risk

[rembrandt]

Hi Mofra ... aaah the quest for the holy grail ... I know it well.

Good effort and your $0.62 holds up but sadly there is a pot hole between Underlying $18.00 and $22.00 ... to the tune of time value differential between sold(+$0.23) and bought(-$0.61) pozzies = -$0.38.

The graph looks like this ...

http://www.users.bigpond.com/equus2/XYZ.jpg

Cheers ...

[Mofra]

Cheers rembrant,

Bubble burst but the lesson learnt. Gross error check would reveal I completely missed the $1 difference at time of exercise on either side.

Do'h! :banghead:

Back to the drawing board....

[Shivan]

Yo Money Tree, I think I've worked it out.

Looking at your website http://www.********.8k.com/, it looks like you're already doing what I'm doing.

Sure it returns consistently huge returns every year with no risk, and you only have to do one trade per year.

I've written an e-book on this called "The Secret Of Risk Free Investing" and published it on http://www.moneyforfree.com.au

Let me know if it's the same thing as what you're doing or if it's a different one and we can share each other's tricks. ;)

Martin

[RichKid]

Yo Money Tree, I think I've worked it out.
Let me know if it's the same thing as what you're doing or if it's a different one and we can share each other's tricks. ;)

Martin

Shivan,
Please read our code of conduct and posting guidelines, you also need Joe's (the Administrator's) permission before advertising your site. If you want to give people your free ebook just post a direct link here to the book after checking with Joe.

[money tree]

News

15th May 2005: - Shivan Pty. Ltd. launches www.moneyforfree.com.au website.

Hmmmm. VERY poor form. Ive been teaching people this strategy since March 2003. Pretty low to flog someones idea and market it as your own.

:swear:

[Milk Man]

Hmmmm. VERY poor form. Ive been teaching people this strategy since March 2003. Pretty low to flog someones idea and market it as your own.

:swear:

I'm guessing this strategy has to do with the self funding instalment warrants strategy on your website?

[tech/a]

Tree.

I doubt it is what your talking about.

I downloaded the book and its religious based.
It basically drones on about how its OK to be a Christian and be wealthy.
Howe its OK to think wealthy and act wealthy.

I had to have a laugh as it is one of those free books where its OK to have a copy if when you pass it on you dont charge anyone for its contents-----

Right at the end however is a donation sheet that if inclined you can fill out and send off with your donation of course.

Yup there is the secret alright------all in the name of GOD.

Gotta say he's the ULTIMATE CEO and the greatest Silent patner of all time!
Has the worlds greatest product----faith and the largest staff on earth which doesnt cost him a cent.
It costs you nothing for the product but if you choose to commercially market the product can make you a fortune! Just give a % away and thats fine by the Boss.

Everytime a BIBLES sold------Who gets the PROFIT?

[Milk Man]

Tech
The strategy theyre pedaling is $97: the free one is different.

[tech/a]

$97---seems cheap for a NO RISK stratagy.

How much is yours Tree?

[money tree]

I'm guessing this strategy has to do with the self funding instalment warrants strategy on your website?

Not that one.


$97---seems cheap for a NO RISK stratagy.

How much is yours Tree?

50 strategies for $590. Maybe $97 ea would be better for me :)

[tech/a]

50 risk free stratagies for $x.

Hell how many do you need I'd have thought 1 would be enough.

How much is one---yeh I know ---$97

What makes them all different or are they just morphs of a basic core methodology?

[money tree]

there are so many derivatives that there are literally thousands of combinations when derivatives are combined:

a. warrants (puts or calls)
b. ETOs (puts or calls)
c. LEPOs (long or short)
d. instalment warrants
e. self funding instalment warrants
f. CFDs (long or short)
g. FPOs (long or short)
h. margin loans
i. managed funds

probably the most well known combo is the 'buy-write' or 'covered call' (b + g). But how many people know about the 'reverse buy-write'? (short stock and write puts).

What if instead of buying the FPO we buy a LEPO and write calls against it? (LEPO buy-write).

Why combine derivatives? A derivative by itself is a directional play. Fine if thats what you want, with associated risk. But different derivatives together can create a non-directional position, and sometimes eliminate risk.

Why would anyone want a non-directional position? 95% of people are consumed with capital gains. The rest look at yield or cashflow. With capital growth there is a large risk that you will be wrong, or not right enough to at least cover brokerage.

The remainder of the equation is what interests me. Usually this is dividends, time premium, interest or a combination.

Here is an example:

c + g

LONG FPOs
SHORT LEPO

net risk = zero (any loss or gain on the FPO attracts an equal gain or loss on the LEPO)

remainder = dividends from FPO (LEPOs have no divs), time premium from written LEPO, interest from margin

There are 50 strategies because each investor has their own risk profile, trading capital, tax situation, intelligence, timeframe, spare time and level of knowledge. One strategy does not fit all. Some strategies can only be used once a year. Hence the 50 :)

[tech/a]

Tree

I'm not understanding.

I thought the discussion was NO RISK stratagies?

Where have these 50 with risk come in?

Why are peoples risk profiles relevant in a no risk situation?

[mit]

Excuse the stupid question but whats a FPO and a LEPO

MIT

[money tree]

Nobody said the 50 strategies were all risk free. Only about 6 of them are. Others are low risk, or risk BELOW that of a normal position.

LEPO = Low Exercise Price Option
FPO = Fully Paid Ordinary

[mit]

From asx:

http://www.asx.com.au/markets/pdf/UnderstandingLEPOs.pdf

"There are several things that LEPOs are not.
They are not the same as buying or selling
shares. Although the exposure with LEPOs is
similar to owning the shares, you don’t receive
dividends directly. The value of the dividend
is factored into the LEPO price."

I certainly wouldn't buy a LEPO that didn't have the premium discounted by the dividend value. I haven't looked up any LEPOs, so is this the case?

Although you do still get the time-decay and the margin interest

MIT

[Shivan]

Hmmmm. VERY poor form. Ive been teaching people this strategy since March 2003. Pretty low to flog someones idea and market it as your own.

I'm offended that you would say that money tree! First you put up a post asking people to show their strategies that produce risk free profits. Then when somebody steps up and comes up with it you flame them. That sounds like the extremists: There is only one God and if you workship another you will go to hell.

How can you accuse me of stealing your ideas when I have been using the strategy since before March 2003 myself, and have never heard of you or your site until yesterday. Therefore, if I have never bought your book, how could I have stolen your strategies and market them as my own?

:eek:


My strategy shows people how to make an extra $5k per year risk free, plus I include some more free e-books how to pick up a few extra K per year.

It sells for $97 because it's only 2-3 strategies. Yours has 50 strategies so sells for $590.

Basically it's all good and there's more than one way to skin a cat. All these strategies are public knowledge, but they are obscured by thousands of pages of law and all that we can do is educate people.

Shivan

[money tree]

I certainly wouldn't buy a LEPO that didn't have the premium discounted by the dividend value.

Who said anything about buying a LEPO? Read again, I said WRITE the LEPO. Most likely its the market maker who buys it.




LONG FPOs
SHORT LEPO

net risk = zero (any loss or gain on the FPO attracts an equal gain or loss on the LEPO)

remainder = dividends from FPO (LEPOs have no divs), time premium from written LEPO, interest from margin


...and have never heard of you or your site until yesterday

thats quite funny since you hung out on my chatroom in 2002/2003.

[mit]

Who said anything about buying a LEPO? Read again, I said WRITE the LEPO. Most likely its the market maker who buys it.


No you didn't read me correctly. If you write the LEPO who is going to buy it if you haven't discounted the dividend. I wouldn't.

Check the November LEPOs for Telstra:

FPO Price $4.59
Option $4.485

That is You can buy telstra at $4.59
You receive $4.485 in premium when you write

Now for any share where the exercise date is NOT after the dividend date the premium is higher than the current share price. The buyer knows he isn't getting a dividend and the premium reflects this.

Dividend is 20c

So if exercised You have paid 4.59 and you receive 4.485 + 0.2 + 0.01
which is 4.695 and the 10.5 cents profit is the time value

TANSTAAFL

Mit

[ducati916]

A + B = C + D

risk A + risk B = total risk + return

first problem is how to get A and B to equal zero. The second problem is how to avoid a -D when C is zero.

Both have solutions

Just been having a nosy through the derivatives forum, when I chanced upon this little nugget. The answer, is of course, arbitrage which by definition is risk free and self funding. The formula is as follows;

S + P = C + X/(1 + Rf)*

S = Stock
P = Put
C = Call
X = Strike
Rf = Risk Free Rate
* = Time [as an exponent]

jog on
d998

[bingk6]

Just been having a nosy through the derivatives forum, when I chanced upon this little nugget. The answer, is of course, arbitrage which by definition is risk free and self funding. The formula is as follows;

S + P = C + X/(1 + Rf)*

S = Stock
P = Put
C = Call
X = Strike
Rf = Risk Free Rate
* = Time [as an exponent]

jog on
d998

OK, so how do we use it to make money :banghead:

[jeffreytp]

Hi Money Tree,

I am interested in your webiste and risk free strategies. Can you please contact me?

Thanks,

Jeff