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Author: krystoff One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 253834  
Subject: Re: Tips wanted for put option short selling? Date: 3/6/2013 1:23 PM
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“Fools try to prove that they are right. Wise men try to find when they are wrong.”

Thank you RayVT.

* Your points are always well taken. Please note that at least, I am not bothering people by arguing with them or by starting new threads.
* I believe that I am displaying an eagerness to find where I am wrong. I also have not tried to prove that I am right about anything. But thanks to you, I will "not try" a bit harder.
* I also doubly agree with you in being surprised if anyone is still bothering to read these posts.
* In addition to my own foolishness, Fool.com forum software is annoyingly primitive. I cannot delete or edit posts made obsolete by later posts. But you are not going to like whatever I say anyway. There is no point to my creating drafts and waiting a week on each post, even if I had such time.
* Meanwhile, I feel obliged to share my findings in exchange for tips received, due to encouragement and example by leading M.I. forum members. This seems a basic ethos of the M.I. forum.
* While on the other hand, the more refined and established my methods become, the less chance it be feasible for me publicly to post them. This should be self-evident.
* Also, show me a book about options and I will show you a tedious mass of unsubstantiated rhetoric.

RayVT, I hope you will remain active in this forum posting such caveats and you have certainly been appropriate here. I will tone down my activity. If nonetheless anyone thinks I might be on to something and wants to work together, feel free to "post reply" and "email this reply to the author." When two people agree, it is always better to work together privately.


CORRECTIONS FOR MY NET-COST AND LEVERAGE-COST IDEAS.

* I suspect it was silly for me to suggest that beginners should favor 2x leverage in order to reduce volatility. That might greatly reduce the benefits of leveraga. And beginners as well as experts probably want to put up relatively small principle. I expect to buy only 1 contract per pick, using 5x or 10x leverage. As suggested in tutorials, I expect frequently to lose -50% before closing a position. Otherwise, the most appropriate way to minimize risk seems to be to pick stocks with low prices.
* In my net-cost formula above, I may multiply all costs by 2 for buy+sell.

* I have not double-checked my calculation for "leverage cost." But after my later study above, showing that leverage may be worthwhile, I will possibly price-shop according to a conservative "leverage cost." To calculate this, I will add a column for "leverage"
= spot/((premium+fee)*2)
= spot/((ask+$0.01)*2)

Or to bias the pick in favor of low leverage for reduced volatility (and also because I am probably neglecting unknown risk factors for leverage):

= (spot*0.75)/((ask+$0.01)*2)

The reason I will try *0.75 is because my initial test above suggests 10x leverage actually might result in 10*5. Or perhaps I am muddled and it is really 10+5. Anyway, actual leverage seems at least explicit leverage x 1.5. So, I am cutting this in half by multiplying by 0.75. So, whether 10x=10x or 10x=15x, the (spot*0.75) seems a significant but not over-restrictive bias in favor of picking less leverage.

(After more experience, or going by the theory you-get-what-you-pay-for, I might decide to adjust the 0.75 to some other figure until every leverage-cost looks roughly equal.)

Next column is "leverage cost" which divides leverage/net-cost.

I.e.,

1. My concept of net-cost with 1x leverage makes it clear to me whether or not a put-buy can expect good results as predicted by non-option M.I. screens. So, this is my litmus test, and my initial calculations show that actual results might be better.

2. If a put-buy with 2x leverage has twice the net-cost of a put-buy with 1x leverage, it seems probably a bargain in bang-for-buck. However this is likely always to bias picks in favor of maximum leverage. And there are many things I do not know. Therefore I will multiply by 0.75 or some other fraction to downplay the benefits of leverage, while still favoring significant leverage.



N. NEW IDEA: SHORT-SELL ETFs OR A "SHORT-SELL INDEX" WITH 5x-10X PUT-BUYS.

My original prejudice was against short-selling index ETFs, and if you do, better use traditional short-selling.

However...

* It now seems to me that IF my scant experience remains consistent, put-buy leverage can be relatively inexpensive, resulting in position sizes of less than $500, and ending up with a relative overhead/gain lower than traditional short-selling with position sizes of %5,000+.
* On the other hand, with or without puts, it adds up to a lot of time and capital to maintain a well-diversified number of individual short positions.
* There are numerous books on trend-trading ETFs. Some are absurd but some may have good ideas for shorting ETFs, much less hassle than individual picks. While this is likely have a negative return, my initial beginner figures show it might provide an effective insurance policy against a major downturn with relatively small capital.
* Later I also hope to achieve a "short-selling index" at an autotrading site, thus to create a known performance record, so anyone can have decent individual short-sell picks for hedging their portfolio with minimal fuss. Or if anyone knows about an existing effective "short-sell index," please tell.

Therefore I may be developing a short-selling index that includes only picks with reasonably priced Puts. But if anyone is interested, I suggest you "email to author." I might not be visiting this forum very often.

Thank you all for your valued tips. And my condolences to anyone who has waded through the posts which I am unable to delete.
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