Your mission Jim....

money tree · 31 January 2005

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 · 1 February 2005

Risk free eh?

[ears open]

ghotib · 1 February 2005

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

money tree · 1 February 2005

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 · 1 February 2005

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 · 1 February 2005

more risk more profits?

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

RichKid · 1 February 2005

tech/a said:
more risk more profits?

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

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

DTM · 1 February 2005

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

money tree · 1 February 2005

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 · 1 February 2005

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.

money tree · 1 February 2005

lots of risk there

think see-saw

RichKid · 2 February 2005

money tree said:
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 · 2 February 2005

money tree said:
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 · 2 February 2005

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 · 2 February 2005

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

DTM · 3 February 2005

money tree said:
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 · 3 February 2005

nice guess, but no cigar

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

wayneL · 3 February 2005

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 · 3 February 2005

DTM said:
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.

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 · 3 February 2005

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.

Your mission Jim....

money tree

wayneL

VIVA LA LIBERTAD, CARAJO!

ghotib

THIMKER

money tree

RichKid

PlanYourTrade > TradeYourPlan

tech/a

No Ordinary Duck

RichKid

PlanYourTrade > TradeYourPlan

DTM

money tree

DTM

money tree

RichKid

PlanYourTrade > TradeYourPlan

RichKid

PlanYourTrade > TradeYourPlan

money tree

RodC

DTM

money tree

wayneL

VIVA LA LIBERTAD, CARAJO!

DTM

DTM

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