AT&T (T) closed at $36.21. A $36 strike call that expires on 3/18 is selling for $1.02. Therefore, if you buy 100 shares of T you pay $3,627.95 (6.95 fee) and at the same time sell the call and receive $94.30 (7.70 fee) you will have the position closed if T stays above $36 and receive $3,674.30 ($20 fee) or a profit of $46.35 or 1.3% on your money in just over a month. Investment won't lose money unless T drops below $35.40.(includes unwinding fee)
That's why I did 200 shares and 2 calls today. Worse case scenario I end up owning 200 shares of T that pays 5%ish dividend for a 3% discount from current price. Best case I get my 1% for the month and look for another play in March.
Likelihood of a 3% drop in T according to Black Scholes model is less than 10% potential yearly gain is 12%. While the extremes can happen and I won't get to make this trade 1,000 times I have a positive potential return. So how does the risk reward profile look bad?
Could you please post this trade. I would love to see it and learn about it. This trade will make you an annualized return of over 12%. You don't have to make a ton of money with every trade to get a good return on your money. Just a small amount on a regular basis.
I guess I could unwind it today with T at 36.25 and the call at 0.80. I would pay $168.50 to close my call and receive $7,243.05 for selling my stock. I would then subtract my initial investment of $7,053.40. This would be a gain of $21.15 or 0.2% in less than 24 hours which if you annualize ends up being 50% return on the year. So, closed out the trade. Thanks for all the advice on this trade being a bad investment. I will try and find another poor trade like this to put on before market close today. edit: to add that the trade was closed.
That's less than an hour overtime before tax or in America, 1 days work after tax at the median wage. P.s. Messing around with 3.7k isn't worth the time and would need a return of atleast 100% to be worth it
So, then do this with 1,000 shares and invest 37K and make your 12% return on your money if you have said amount to invest. That amount is worth messing around with to me. Edit to add last sentence.
Taking a look at risk:reward. Risk = $3,627.95 - $94.30 = $3533.65. You might assume that the shares will not fall to $0, but what you assume is irrelevant. Your total exposure, or risk, is $3533.65. Usually, this risk is considerably lowered by a risk managed contingency plan - or a stop-loss. Clearly this is not the case, and you have no contingency in place, as you state that the worse case scenario is you end up owning shares that pay a %5 dividend. NO. In this case the worst is that you have relinquished $3533.65 of capital into shares of falling value, or worthless value, with no guarantee of a maintained divvy, and no guarantee of a share price that stays > $0 while you wait for the hypothetical 5% dividend to claw back your losses. This is all optimistic hypothetical, so don't pretend... consider the capital gone. It is erased from your trading account for at least an indefinite period of time. Multiple occurrences of this happening to this amount are obviously unsustainable. So you have no choice but to consider it gone. Reward = $46.35 Thus, your risk:reward ratio = $3533.65:$46.35 =76:1 Now, under this scenario, over the long-term, you need to win 75/76 trades just to break even! That's right, you need to maintain a win:loss ratio of 75:76, or a 98.7% strike rate on your trades, just to prevent making a loss. This is impossible. The best traders in the world cannot achieve anywhere near a strike rate of 98.7%. To put it in perspective, 76:1 is more than twice as bad as the odds of winning on a single number a roulette wheel. So, by definition, and mathematical fact, you are doomed to wipe out your account, and blow up. Sorry, but this is not opinion - it is inevitable if you keep trading such poor numbers that you will wipe out. Personally, I don't take a trade unless the risk:reward ratio is better than 1:3, which incidentally is around 230 times better than the ratios you are trading.
This Is not accurate investing math and is completely contradictory to investing in anything long term. What is the probability of T going to $0 in a month? I will bet you my entire stack of silver against 1 oz of your silver that T will be above 0 on March 18, 2016. Who is it that always says while anything is possible it is not probable? Let's assume for the sake of argument I think T is going to drop in price. Instantly I am not putting this trade on. So, therefore I have done my due diligence and decided it is not and in my opinion it is going to hold put or climb (which is what I decided). So I put my trade on that has a 90% of me making money or breaking even. My break even is at $35.33 with the stock currently at 36.20. I set a stop loss down at $35. Which according to the Nobel prize winning black scholes model of having a 1% chance of reaching. So I have $66 dollars of risk with a 1% chance of happening and a $46 reward with a 90% ish chance of happening. In other words if I did this 100 times I would lose $66 1 time and win $46 90 times. Thus 5,850 - 66 = a great expected return. Or maybe I've just gotten really lucky this time and made $20 in under 24 hours was pure luck. I do my due diligence on the stock before I look at making any trade and use a model to run the probability of the outcomes. These aren't optimistic guesses these are statically sound numbers. Can you post one of these risk reward of 1:3 trades for me? I'd love to see it in action.
^ ok now the real question. If it truly is relatively free money, why isn't everyone already doing it?
Everyone did it until the price reached parity and it was no longer a viable trade with those numbers. That is why no 1 strategy works. Numbers get out of line with statistics and a high probability trade gets created, but as people rush to make the trade supply and demand swing the trade back to the appropriate statistics and thus makes it no longer a good opportunity. If you don't have a statistics model and are trading options you are simply making guesses. Also, if you want a trade with 99% likelihood of being correct just sell uncovered puts/calls on a stock 3 standard deviations away from its price. The problem there is you only make 0.000001% on your money. I don't care how accurate I am on my trade as long as the expected return is positive. Example. If you pick a number 1-100 and I pay $1 to guess at that number. If I guess it you give me $1,000. I may lose 99 times and only be right 1 or 1% accuracy, but my expected return is close to $900. Thus this is a good trade.
^ what a stupid example who is going to offer odds like that. Now you're just making yourself look bad P.s. I thought the return you'd be after was more in the $100:$100.10 range not $100:$1000
Sorry. Thought I would make the math easy after ^. Last time I did math 1:3 is only about 25 times better than 1:76 not 230 times.
This is very accurate investing math, and is based on the exact information you offered above. Don't know why you are referring to investing long-term, because selling covered calls over a 4-week time interval does not constitute long-term investing? So I am confused at the "contradictory"? You are probably correct, the probability of T going to $0 in a month is very low... but that is irrelevant. My calcs were based on your own statement regarding getting stuck with shares priced lower than break-even. According to the strategy you outlined above: "Worse case scenario I end up owning 200 shares of T that pays 5%ish dividend for a 3% discount from current price". By definition, that makes your exposure equal to the full capital outlay. I am not making anything up... I am only answering a question posed by you, based on the information you offered. Lets not assume. Like I said above, what you assume is irrelevant. Due diligence and opinion accounts for nothing in risk:reward strategies either. Lets also not assume that the trade has a 90% chance of making money. If you are not assuming this, then I'd like to see how you calculated your 90% expectancy? If you think you can calculate your trading expectancy using black-scholes, then please, for your own sake, revisit this! Firstly, your newly stated strategy of using a stop-loss changes everything. Given you didn't mention this only 48hrs ago, it was a smart decision to quickly introduce some risk management into your trading strategy. However, be wary. While black-scholes gives a reasonable theoretical estimate of the price of European-style options at any instant in time for delta hedging, it has many drawbacks outside of this application. Firstly, the true probabilities underlying the B-S equation are actually postulated. You cannot deduce the real-world probabilities from the option prices. There are too many assumed constants used to make it a good forward price estimator, the major one being volatility, but also others like the risk-free rate of return. Also, B-S is intended for some European-style options (eg with continuous dividends). Most barrier options - eg American barrier options with discrete dividends - have no analytic solution and thus numerical methods, such as the trinomial lattice, must be used. You cannot get "true probabilities" (empirical distribution) from the BS model. The B-S option price calc is based simply on risk neutral expectation of payout. "True probabilities" are irrelevant in Black-Scholes. Again, be carful in assuming your probabilities are true for the scenario you are applying them to. Sure. Here are a few, all with preceding dialog of the trade entries, so you can see they were genuine (none were posted with hindsight ). Oh, and the last one on this list was particularly most satisfying : http://forums.silverstackers.com/topic-22890-how-to-turn-a-10oz-bar-into-a-30oz-bar-overnight.html http://forums.silverstackers.com/message-389877.html#p389877 http://forums.silverstackers.com/message-478811.html#p478811 http://forums.silverstackers.com/message-506860.html#p506860
Gee, I hope your ability to calculate probabilities and expectancy is better than your ability to calculate ratios? Last time I did math, 76:1 did not equal 1:76 So, my calculation stands, it is around 230 times better than the ratios you are trading (228 to be exact). I'll let that one slide.
