Many investors have become interested in trend following strategies in recent years due to the scars of living through two major bear markets since 2000. In my firm, we also believe in trend following as a sustainable method for managing the downside risk of investing in risky assets like equity index funds and ETF's.
Diversification can be an issue for traders with smaller account sizes. It can be incredible difficult to trade covered calls and create a diversified portfolio. For example, an investor with a $25,000 account would use up over half his capital doing one covered call on AAPL stock.
Many options traders seem to have a problem defining themselves. Repeatedly, we see traders describe themselves as conservative, using options primarily to hedge market risk. But … are they staying true to this definition.
Nothing can impact an investor’s success more than discipline. Warren Buffett noted that “the stock market is a device for transferring money from the impatient to the patient.” In studying the returns of various asset classes, JP Morgan made the startling conclusion that the average investor is the worst performing class:
I’m a big fan of the work of Cliff Asness and AQR (Applied Quantitative Research). Cliff was interviewed by Barry Ritholtz on his podcast. About twelve minutes in Barry asked Cliff what it means to be a quantitative investor.
Most traders are familiar with calendar spreads as a directionless trade that benefits from accelerated time decay for the near-term expiry position vs. the longer-dated option and benefits from volatility expansion. A "long calendar" spread is created when we sell the front month and buy the back month, getting a debit.
I've had few emails from people being assigned on positions and receiving margin calls, and generally not knowing what happened. I advise everyone to completely research and become familiar with the exercise/assignment aspect of option trading.
A good trade is one where you followed your process regardless of whether you made money or not. A bad trade is one where you didn’t follow your process regardless of whether you lost money or not. Amateur traders make one big mistake at the beginning.
Investing in bonds is considered a conservative way to hedge your falling stock trades.. Analyst and long-time market commentator Mark Hulbert noted this week that despite this past month’s price action, bonds are still a stock market hedge against stock market losses.
With fewer trading days and a historical record that favors an uptick in stocks and a downtick in volatility, the end of the year never fails to present an intriguing set of trading opportunities. One phenomenon related to the above is something I have labeled the “holiday effect".
Is the Black-Scholes pricing model of options accurate? Or even close to accurate? A very interesting study conducted by Sibson Consulting was cited in an article on the topic (Tim Reason, “The Holes in Black-Scholes,” CFO Magazine, March 1, 2003).
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