33 lines
2.3 KiB
Plaintext
33 lines
2.3 KiB
Plaintext
options in their heads and make money on price anomalies of 1/16, or, as
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they call it, a “teenie.” For perspective, the reader may contemplate a
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conversation the editor had with one of the most important options traders
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in the world who remarked casually that his fortune was built on teenies.
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The reader may imagine at some length what would be necessary for the
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general investor to make a profit on anomalies of 1/16. (EN10: The advent
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of digital pricing has given market makers and specialists even more
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flexibility to beat the investor by shaving spreads, theoretically, to $0.01.)
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This does not mean the general investor should never touch options; it just
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means he should be thoroughly prepared before he goes down to play that
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game. In options trading, traders speak of bull spreads, bear spreads, and
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alligator spreads. The alligator spread is an options strategy that eats the
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customer's capital in toto.
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Among these strategies is covered call writing. This strategy is touted as
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being an income producer on a stock portfolio. There is no purpose in
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writing a call on a stock in which the investor is long—unless that stock is
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stuck in a clear congestion phase that is not due to expire before the option
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expires. Besides, if the stock is in a downtrend, it should be liquidated, but
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to write a call on a stock in a clear uptrend is to make oneself beloved of the
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broker, whose good humor improves markedly with account activity and
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commission income. The outcome of a covered call on an ascending stock
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is that the writer (you, dear reader) has the stock called at the exercise price,
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losing his position and future appreciation, not to mention costs. The
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income is actually small consolation, a sort of booby prize—a way of
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cutting your profits while increasing your costs. Nevertheless, covered
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writes are justified and profitable in some cases.
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Quantitative analysis
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The investor should be aware of another area of computer and investment
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technology that has yielded much more dramatic and profitable results, but
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that is in a model-driven market—namely, the options markets. Quantitative
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analysts, those who investigate and trade the options markets, are a breed
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apart from technical analysts. In an interesting irony, behavioral markets,
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the stock markets, are used as the basis for derivatives, or options whose |