Boiler Room: The Official Stock Market Discussion

[Futuristic Eskimo]

Are you guys actually beating the market consistently utilizing these hedging strategies? It honestly seems like a waste of time for an investor that is making a directional bet. Also, how do you weigh the benefits of active portfolio management against the tax advantages of buy and hold? After-tax return is more important than anything else.

 

[Ohene]

Are you guys actually beating the market consistently utilizing these hedging strategies? It honestly seems like a waste of time for an investor that is making a directional bet. Also, how do you weigh the benefits of active portfolio management against the tax advantages of buy and hold? After-tax return is more important than anything else.

if youre asking me...i only buy options because they leverage the gains. i dont use them as hedging at all.

The only way i'd use an option as a head is if I was long lets say 10 companies (calls or equities) for a total of $10000 but was scared the bull market might come to a screeching halt. I'd buy one $500 SPY Jan 2016 put (strike 155) and call it a day . I am considering doing this now that I'm building my portfolio. The SPY is moving too freely right now.

That way if I got a 25% return of $2500...the $500 option loss wouldnt be too bad but a necessary evil. But lets say the SPY went from 192 to 150 for whatever reason this time next year....that SPY puts would be worth $1500 (according to the CBOE option calc)...enough to offset the short term loss from the equities which will probably go back up eventually anyways .

 

[Futuristic Eskimo]

if youre asking me...i only buy options because they leverage the gains. i dont use them as hedging at all.

The only way i'd use an option as a head is if I was long lets say 10 companies (calls or equities) for a total of $10000 but was scared the bull market might come to a screeching halt. I'd buy one $500 SPY Jan 2016 put (strike 155) and call it a day . I am considering doing this now that I'm building my portfolio. The SPY is moving too freely right now.

That way if I got a 25% return of $2500...the $500 option loss wouldnt be too bad but a necessary evil. But lets say the SPY went from 192 to 150 for whatever reason this time next year....that SPY puts would be worth $1500 (according to the CBOE option calc)...enough to offset the short term loss from the equities which will probably go back up eventually anyways .

Right, I understand using options for leverage. My question is more about how much value these hedging strategies can even bring to your portfolio. I understand that they give a trader peace of mind, but is that peace of mind rational and can you consistently beat the market doing this? It just seems to me that long-term buy-and-hold is the better option when taking into account taxes.

 

[Ohene]

Right, I understand using options for leverage. My question is more about how much value these hedging strategies can even bring to your portfolio. I understand that they give a trader peace of mind, but is that peace of mind rational and can you consistently beat the market doing this? It just seems to me that long-term buy-and-hold is the better option when taking into account taxes.

i agree...to a retail investor with only a few holdings its pretty pointless. I might be gassed off of last years bull market but I think I have the juice. If you do the knowledge there is no reason you cant select 10 companies and beat the market accordingly

 

[Futuristic Eskimo]

i agree...to a retail investor with only a few holdings its pretty pointless. I might be gassed off of last years bull market but I think I have the juice. If you do the knowledge there is no reason you cant select 10 companies and beat the market accordingly

Every single academic paper I've seen disagrees. Of course it is possible to do it and probably easier the smaller the portfolio, but almost no one does consistently. A person simply can't compete with a trading algorithm these days.

Edit: This is all to interesting for me to stop stock-picking completely, though.

 

[7oclock]

Every single academic paper I've seen disagrees. Of course it is possible to do it and probably easier the smaller the portfolio, but almost no one does consistently. A person simply can't compete with a trading algorithm these days.

Edit: This is all to interesting for me to stop stock-picking completely, though.

Academics is a good way to lose money - only use that as a foundation. If you have a particular strategy, there's no reason you can't beat the market consistently. You have investors who live off this - that are definitely beating the market 60-70% of the time.

 

[7oclock]

Right, I understand using options for leverage. My question is more about how much value these hedging strategies can even bring to your portfolio. I understand that they give a trader peace of mind, but is that peace of mind rational and can you consistently beat the market doing this? It just seems to me that long-term buy-and-hold is the better option when taking into account taxes.

I'm going to chime in, because I think you saw some of my postings about non-directional plays and hedges.

Again, it depends on your strategy and total portfolio management. If you're okay with buying a bunch of stocks and holding even if the market is in extreme sell off then so be it, you can easily lose 10% and make 15% the next year. Meanwhile, by implementing certain plays/strategies I would be aiming on making at least 10% a month and at least 30-40% return on the year in bull, bear, and sideway markets. So yes, there's quite a bit of value in "hedging" / option strategies.

Options give you a lot more flexibilty...sure you can use stocks to play directional moves , you can even straddle stocks (go long and sell short a stock and you have a straddle). But, when you start playing the intrinsic value of long dated and near dated options - you come into a more scientific and statistical investment. One where you have different levers that could ultimately trump any equity portfolio during the same time span. You're now in a realm where you can look at portfolio distributions, bell curves, etc. etc. and see how your plays -statistically - can put you into profit.

The above may sound confusing but here's a question, in what equity instrument, can you get paid if the stock does not move?
If a stock has been ranged bound for the past 2-3 month with no real catalysts , whose to say you can play month 4? Obviously it could move up or down, but it could also stay in the same location and with no real catalysts even if it moved up, it would be a small move. I would put on an iron condor, butterfly spread, iron butterfly, broken wing, sell a straddle/strangle, or do a double calendar - depending on the greeks and the statistical probability of each. so while you're portfolio is not moving - i would have gained 20-50% depending on the strategy in a stock that doesn't move. You build around that by hedging within other stocks or the market by doing some sort of spreads so that if the stock does move because of improvement in the market you can still win.

Equity trading is easy, looking at charts is subjective - double tops and double bottoms is all about perception isn't it. When you get to options there's math behind it - there's statistics behind it and it vastly improve your strategy and portfolio management

 

[Erdos]

I'm going to chime in, because I think you saw some of my postings about non-directional plays and hedges.

Again, it depends on your strategy and total portfolio management. If you're okay with buying a bunch of stocks and holding even if the market is in extreme sell off then so be it, you can easily lose 10% and make 15% the next year. Meanwhile, by implementing certain plays/strategies I would be aiming on making at least 10% a month and at least 30-40% return on the year in bull, bear, and sideway markets. So yes, there's quite a bit of value in "hedging" / option strategies.

Options give you a lot more flexibilty...sure you can use stocks to play directional moves , you can even straddle stocks (go long and sell short a stock and you have a straddle). But, when you start playing the intrinsic value of long dated and near dated options - you come into a more scientific and statistical investment. One where you have different levers that could ultimately trump any equity portfolio during the same time span. You're now in a realm where you can look at portfolio distributions, bell curves, etc. etc. and see how your plays -statistically - can put you into profit.

The above may sound confusing but here's a question, in what equity instrument, can you get paid if the stock does not move?
If a stock has been ranged bound for the past 2-3 month with no real catalysts , whose to say you can play month 4? Obviously it could move up or down, but it could also stay in the same location and with no real catalysts even if it moved up, it would be a small move. I would put on an iron condor, butterfly spread, iron butterfly, broken wing, sell a straddle/strangle, or do a double calendar - depending on the greeks and the statistical probability of each. so while you're portfolio is not moving - i would have gained 20-50% depending on the strategy in a stock that doesn't move. You build around that by hedging within other stocks or the market by doing some sort of spreads so that if the stock does move because of improvement in the market you can still win.

Equity trading is easy, looking at charts is subjective - double tops and double bottoms is all about perception isn't it. When you get to options there's math behind it - there's statistics behind it and it vastly improve your strategy and portfolio management

Is there any good books on options. I've learned a lot about them from the academic side, how they work, etc. But nothing that was practical.

 

[Futuristic Eskimo]

Academics is a good way to lose money - only use that as a foundation. If you have a particular strategy, there's no reason you can't beat the market consistently. You have investors who live off this - that are definitely beating the market 60-70% of the time.

Right, well i havent seen any evidence of this being true. There are statistical measures that break down portfolio managers` performances down to luck and skill and very few, an almost statistically insignificant number, beat the market consistently because of skill. When taking this into account, how can an individual investor, with access to presumably even less information, outperform the market and these professionals year to year? Not saying it doesnt happen. Just that it is very rare and not worth even attempting.

 

[Ohene]

Right, well i havent seen any evidence of this being true. There are statistical measures that break down portfolio managers` performances down to luck and skill and very few, an almost statistically insignificant number, beat the market consistently because of skill. When taking this into account, how can an individual investor, with access to presumably even less information, outperform the market and these professionals year to year? Not saying it doesnt happen. Just that it is very rare and not worth even attempting.

how \do they distinguish between luck and skill?

It's one thing to pick a stock with 10M trading volume a day and news reports all over the place.

But there are companies like Live Nation who have no comparables, no news coverage and low volume. Can't tell me luck is involved when discovering those types of companies as opposed to a financial institution or tech stock.

 

[7oclock]

Right, well i havent seen any evidence of this being true. There are statistical measures that break down portfolio managers` performances down to luck and skill and very few, an almost statistically insignificant number, beat the market consistently because of skill. When taking this into account, how can an individual investor, with access to presumably even less information, outperform the market and these professionals year to year? Not saying it doesnt happen. Just that it is very rare and not worth even attempting.

Portfolio managers are moving large sums of money and have certain rules they have to play by, while they have more information - they all are trying to get in and out of positions with large holdings. When you're a smaller investor - some of which have the same and sometimes better information you can get in and quicker due to the amount of capital be using. (e.g. a fund manager whose prospectus is investing in precious metals - despite all forecasts showing this is not the place to be in he has to remain in and take his lumps , now he'll try to keep this at the minimum (a good sign of a good fund manager) whereas me, I can just get out of gold all together and go on to the next wave).

S&P is just a weighted average and thus the movements is an average movement and price is very predicated on supply and demand, you can almost conclude that there's 50% winners and 50% losers...not hard to fathom an intelligent small individual investor being part of the 50% winner and also being in the 70th+ percentile in regards to return.

 

[7oclock]

Is there any good books on options. I've learned a lot about them from the academic side, how they work, etc. But nothing that was practical.

I don't know any good books, but I don't know any bad ones either.

open an account with play money and start learning how to do basic naked puts and calls...in fact go to investopedia or some of these online sights and read up and practice them in a paper account, so you get the feel of what happens.


a book will teach you about options greeks but you will get bored and won't understand the true effect. It's like reading about driving a car...you don't know the true feel until you're behind the seat with the wheel and gas pedal.

 

[Futuristic Eskimo]

Portfolio managers are moving large sums of money and have certain rules they have to play by, while they have more information - they all are trying to get in and out of positions with large holdings. When you're a smaller investor - some of which have the same and sometimes better information you can get in and quicker due to the amount of capital be using. (e.g. a fund manager whose prospectus is investing in precious metals - despite all forecasts showing this is not the place to be in he has to remain in and take his lumps , now he'll try to keep this at the minimum (a good sign of a good fund manager) whereas me, I can just get out of gold all together and go on to the next wave).

S&P is just a weighted average and thus the movements is an average movement and price is very predicated on supply and demand, you can almost conclude that there's 50% winners and 50% losers...not hard to fathom an intelligent small individual investor being part of the 50% winner and also being in the 70th+ percentile in regards to return.

Yes. My point is that the difficultly lies in being part of winning 50% year in and out. I've already mentioned that it might be easier to do it when managing a small portfolio, but you balance that against the inevitable informational asymmetry. I'm aware it is possible to beat the market. I have done it for the past year and a half. The way the market is set up, you are at a disadvantage trying to trade against algorithms. There are HFT firms out there that have never had a losing day. If there is an abundance of alpha out there, my bet is that they are going to capture it. When factoring in transaction costs and tax advantages long term, I simply don't see how you can possibly advocate your methods over longterm buy and hold and index fund investing.

how \do they distinguish between luck and skill?

It's one thing to pick a stock with 10M trading volume a day and news reports all over the place.

But there are companies like Live Nation who have no comparables, no news coverage and low volume. Can't tell me luck is involved when discovering those types of companies as opposed to a financial institution or tech stock.

Perhaps someone with more experience on the street like @Domingo Halliburton can chime in here on this, but I know firms utilize some kind of statistical analysis to find out if their traders and portfolio managers' returns derived from simple luck or actual skill. I'm going to see if I can find something about it online, but these techniques might be proprietary in some cases.

 

[Futuristic Eskimo]

No talk about the Phil Mickelson and Carl Icahn fukkery? If Icahn gets taken down because of this

Feds Investigate Carl Icahn, Phil Mickelson And William Walters For Insider Trading - Forbes

 

[Domingo Halliburton]

Yes. My point is that the difficultly lies in being part of winning 50% year in and out. I've already mentioned that it might be easier to do it when managing a small portfolio, but you balance that against the inevitable informational asymmetry. I'm aware it is possible to beat the market. I have done it for the past year and a half. The way the market is set up, you are at a disadvantage trying to trade against algorithms. There are HFT firms out there that have never had a losing day. If there is an abundance of alpha out there, my bet is that they are going to capture it. When factoring in transaction costs and tax advantages long term, I simply don't see how you can possibly advocate your methods over longterm buy and hold and index fund investing.

Perhaps someone with more experience on the street like @Domingo Halliburton can chime in here on this, but I know firms utilize some kind of statistical analysis to find out if their traders and portfolio managers' returns derived from simple luck or actual skill. I'm going to see if I can find something about it online, but these techniques might be proprietary in some cases.

i haven't read the exchange you guys have had for the last posts but I'll check it out. I do tend to agree with you though. Just statistically speaking you'll do better buying and holding.

i dont exactly work on the street but i do work for a boutique investment bank across the river . Now im more of a broker or placement agent for mid-sized businesses and find them either lenders or investors. And we get retainers and success fees that i get a part of.