patrick.net

TN

I hope you're right and this time results in the daytraders getting trapped. I only say this because I have sector hedge positions with downside bias; and they're not looking great right now.

How much do you really think the daytraders add to price movement? I got the impression most remaining daytraders were either scalpers or day momentum players using super low commission brokers and esignal or tradestation...

Peter P,

Thank you for clarifying (on my behalf) that which I did not fully understand myself.

Yeah, yeah that's the ticket! "Perceived size". Yeah, yeah.

Randy said,
By theta I mean the component of theoretical options pricing that is the time left on the contract. As that goes up, the option gets more expensive. At some point, the premium you pay for locking a far future price is more than the value at that price, considering the risk-free rate, etc.

Oh, ok. I understand this conceptually, but I don't have an MBA, so I can't do the math precisely. I'm not a big believer in Black-Scholes anyways... just kind of go by the seat of my pants...

I’m not a big believer in Black-Scholes anyways… just kind of go by the seat of my pants…

Black-Scholes is still useful in what-if analysis.

B-S is pretty close to actual trading market price for liquid options. Whether this is because B-S is accurate or because everyone is using B-S is a question I leave to Peter P and others to ponder.

I will say that there are other methods, like the bi-nomial method, which are much more complex but tend to produce results very close to B-S. I'll leave the arguments about why that might be to our resident postmodernist, DS.

Glen,

I did a similar play back in OCT 01. Nobody, and I do mean nobody was touching telecom with a ten foot pole. I found this rinky dinky Global Science and Technology Fund that tanked right out of the gate. IPO'd just prior to 9/11. After holding it for about a year it was up over 70%. I figured people aren't going to out grow the need to communicate and we're not going to "out grow" the need for housing! I'd have to say though (no matter how successful) it was a pretty speculative play.

Whether this is because B-S is accurate or because everyone is using B-S is a question I leave to Peter P and others to ponder.

Why me, I was only B-S'ing. :)

tannenbaum,

No problem. As I said, the info you provided, makes it even funnier.

DinOR,

I did something similar, but with the big tanking telecoms that were ripe for consolidation. But I was very much an industry insider at the time, so I'm not sure how speculative that actually was, looking back on it.

Peter,
I definitely think it is useful. It is actually a pretty decent way of looking at the factors that should affect option pricing. But I think it can also lead to systematic mispricing in some cases.

Real Estate Expo in SFO at end of August. Anyone ?

You don't want to miss Al Gore and George Foreman teaching about RE, do you ?

But I think it can also lead to systematic mispricing in some cases.

Just make sure you have the "right" volatility input. If you do, you will have the "right" price. ;)

In practice, this is very difficult because volatility changes across strikes, time, and underlying price.

DinOR,

I have a few bucks set aside as "mad money" for purely speculative purposes. I can afford to lose it all if my strategy backfires (though of course, I would prefer not to). These kinds of investments are the most fun. (Especially with DHI up over 5% today--go baby go!) Gambling, pure and simple. I don't pretend it is anything else.

You don’t want to miss Al Gore and George Foreman teaching about RE, do you ?

Huh? Does grilling food contribute to global warming?

The next thing they usually learn is “don’t ever be short naked options, it’s too risky.”

However, one can be tempted into writing too many contracts of Far OTM options. When the market makes the "wrong" move, the margin requirement can escalate very quickly.

Conor,
You are right... I have a lot to learn. Which is why I am very cautious about the amount of money I put into options. (More like a trip to Vegas than a deposit on a house.) And I know enough to know what my downside is on any particular trade.

I guess what I am saying is that I'm not sure that things like historical volatilty should matter so much. It is really just technical analysis dressed up in scientific clothing. Historical volatility tells you very little about future volatility, IMO.

There are so many non-quantifiable factors that go into investing. Sometimes you just need to sit down and figure out what you think a stock is worth, then hope the market agrees with you before your LEAPS expire.

Your sarcasm’s often funny, but I don’t find any humor in your racial comments.

How is that a racial comment? It has some truth to it.

Ok, ok. This runup is ridiculous. Nothing goes up 7% a day on no news. Plus, Conor is scaring me about my ignorance. I sold my DHI LEAPS. Maybe I'll buy them back later.

I know, I know. I'm a filthy daytrader!

I guess what I am saying is that I’m not sure that things like historical volatilty should matter so much. It is really just technical analysis dressed up in scientific clothing. Historical volatility tells you very little about future volatility, IMO.

That is an important realization. ;)

Volatility itself can be more volatile than price. However, it has been said that volatility tends to be more range-bound than pirce.

Not investment advice

Randy H,

For years we've been told:

Food, Clothing, Shelter (and I agree). Along about the 1970's I believe we added Transportation as a necessity of life. I'd like to add Communications (if we haven't already). People's need to communicate is going to diminish just b/c World Con is tanking. (But it doesn't hurt to be an insider).

Glen,

We don't so much daytrade to make money but to mitigate risk. (At least I do).

Why would you need to daytrade to mitigate risk? Couldn't you just buy an index fund and some protective puts and call it a year?

Glen,

You sure could. And many do. One thing I've found over the years is that when you have a long term position in a portfolio that has done well after no time at all we begin to take this performance for granted. By trading a shorter term position with a higher cost basis it really holds your feet to the fire. You ARE interested in every aspect of the company! Think of all the guys (intitutional or otherwise) that considered say Lucent their primary growth engine? By the time they took an active interest in what was going on at the company it was all over. Nothing motivates me like having an "active" stake. For me it's all about entry points. From what you've described you watch these closely as well.

There are a lot of condos being built in Cupertino. I do not know how it will affect the SFH market. We will see.

It will be interesting to see how the new "poorer" condo purhcasers and their kids affect the touted Crapatino schools. I'll be the SFR owners are not all that happy with this.

It will be interesting to see how the new “poorer” condo purhcasers and their kids affect the touted Crapatino schools. I’ll be the SFR owners are not all that happy with this.

Well, "poorer" condo purhcasers are still better than jealous bitter renters, right? ;)

"Keep your stinking kids off our school you damn dirty renter."

TN,

A bit sloppy on my part, but I lump in 0-3 month swing traders in with daytraders.

I agree that "day-traders" are more than just those who close out their position every day. My own definition is even a bit sloppier than yours. For me whether one is a daytrader depends upon their intent, discipline, and knowledge of their chosen strategy.

For example, a true daytrader scalper who just sits there all day playing twitch on spreads is one extreme. The mutual fund trader is the other. But somewhere in between you have private, semi-private, family, investment circle, and upstart hedge fund types who may fall into either group depending. There are hedge fund traders who are not better than a 3/5 swing trader, only with more money for protective puts/calls. There are individuals investing for themselves and their families who are more knowledgeable, more disciplined and more successful than some reckless hedge funds.

“Keep your stinking kids off our school you damn dirty renter.”

:lol: When I read that, I heard it in Charlton Heston's voice.

Conor,

I bought the LEAPS because I was reasonably confident that DHI would not fall much further than $20 and that there was a reasonably good chance that DHI would be above $30 at some point in the next 2.5 years.
I was willing to wait the 2.5 years, if necessary. And I was willing to lose 100% of my investment if I was wrong. (Note to other micro-investors: I'm pretty sure you can deduct up to $3K in capital losses to offset ordinary income. So if you lose out on a small bet on options, your after tax losses should be less than your pre-tax loss. To some extent you can time the market to take advantage of this by selling your loser LEAPs and holding your winners.)

I took profits because it is rare that I can make 25%, after expenses, in less than 2 weeks. But I'm still reasonably confident that the company will do well in the long term. If the stock drops back below my entry point ($20), I will seriously consider getting back into the LEAPS.

Overall, my investments have done fairly well relative to the market. The only reason I'm experimenting with options at all is that I am tired of my 100% long only portfolio of value stocks and I wanted to try to juice my returns a little by using a manageable amount of leverage. Options are really the only meaningful way I know of (other than homeownership, which is unappealing to me in the current market) for a little guy to get some serious leverage.

King_Cobra,

Great. Now serial refinancers can go almost indefintely without having to make a payment! I'm all for streamlining and implementing technology that makes sense but can you imagine how much "churn" a system like this can create? It's the equivelant of having your "Equity Liberator" tied to an ETrade account. With "margin pre-approval"!

King Cobra,

Interesting article. The NAR cartel is in jeopardy. I wish Redfin was a publicly traded company because I suspect that they will take massive market share from traditional brokers. RE brokers will go the way of the travel agents.

The new technology should eventually bring down the cost of buying a home. Once house listings are universally available online, buyers and sellers will have better information. And this availability of information may mean that the correction we are all waiting for could happen a lot quicker than previous downturns as buyers realize how many options they have in the current market and sellers are forced to lower prices in order to compete.

Glen,

I know I've mentioned these guys before but if you are interested in leverage Rydex Funds offers long and "inverse" funds that offer 2 to 1 leverage. This is especially nice for IRA's b/c they some how meet the IRC acid test. If you want to short the S+P 500, NASDAQ, Long Bond or even the Yankee Dollar they have something for you. When you get a chance check them out. www.rydexfunds.com.

*Not a paid endorsement/NIA

Bill C Says:

I’m Asian and I’ve never wanted to live in Cupertino and don’t even know where Monta Vista is. Your sarcasm’s often funny, but I don’t find any humor in your racial comments.

I am an Asian too. From India. All my Asian friends and me, live in Cupertino. All live there for the same reason. Schools. The difference is, I am the only renter.

There wasn't much humor in my comments anyways. It's actually sad. These are very bright engineers. I ask them - or used to ask them long time ago, not now - you pay 1M$ for what ? Elementary education for your kids. Where will you get money for their college ? Answer: The house will appreciate, as it has been all these years. Then I asked, what if it didn't ? That's it. They didn't really enjoy that discussion. I quickly realized to keep quiet, as I didn't want to loose friends. Now years later, I found this blog and I vent out here.

So it is sad but true. I did not imply ALL Asians to be desperate to live there. Not at all. But go to the open houses in Monta Vista. See the arrogance of RE agents, and notice the desperation of the mostly Asian buyers. (That HAS changed - very very recently.) Look up the sales history, appreciation and price per sqft change. You will realize what I am saying. We Asians put a lot of importance on good school education, all for good reasons IMO. Hey, that's why I rent in Cupertino. But saying it's worth the financial suicide, IMO is idiotic.

Where will you get money for their college ? Answer: The house will appreciate, as it has been all these years. Then I asked, what if it didn’t ? That’s it.

Then they will send out resume with Monta Vista High prominently listed as the primary achievement. Or perhaps there will be Voodoo student loans that take souls as the collateral?

We Asians put a lot of importance on good school education, all for good reasons IMO.

What is the point of a good high school?

One can always just go to a community college, transfer to a UC, and get a master degree from Stanford.

# skibum Says:

It will be interesting to see how the new “poorer” condo purhcasers and their kids affect the touted Crapatino schools. I’ll be the SFR owners are not all that happy with this.

Oh, the current residents don't like it a bit. Not even an insy winsy tiny bit. "The schools are going to get crowded. The SCHOOLS, damn it.". What is Cupertino if not the schools ? Take those away, and it's nothing special. What happens to their home prices, if school ratings don't remain where they are ?

I was surprised that the projects got the permissions. I remember the angry discussions in parties and offices, during and after the votes.

Welcome to Condotino.

I was surprised that the projects got the permissions. I remember the angry discussions in parties and offices, during and after the votes.

They can always vote to increase property tax to 3% if they worry about school crowding.

They can always vote to increase property tax to 3% if they worry about school crowding.

Awesome ! 3% of 1M every year ? I love it.

What is the point of a good high school?

One can always just go to a community college, transfer to a UC, and get a master degree from Stanford.

Excellent point. I have long questioned the Realtor "common wisdom" about buying into the best school district you can afford. Once you get out into the adult workforce, nobody gives a shit about where you went to high school. In fact, most of the time they don't even care where you got your degree from, unless you work in an academic, medical or research field. Employers primarily care about experience, skills and political connections --not necessarily in that order.

There is definitely value in buying a house in a safe school district, though. Especially if you don't want little Johnny joing the local chapter of MS-13 or getting knifed over his lunch money.

DinOR,

Thanks for the tip, but I'm not that bullish on the overall market. Just trying to pick my spots.

I have considered the Rydex funds and/or certain leveraged ETFs and closed end funds for my IRA. I like the idea of buying a leveraged international bond fund as a dollar crash hedge. I used to own AWF (leveraged international bond fund) for the high yield and dollar hedge, but I sold it last year. My problem with the Rydex funds is that the expense ratios are a little too high for my liking. Vanguard should come out with a low cost leveraged index fund.

Most of my money is in my IRA, so I can only buy LEAPs in my (small) taxable account. But I like using leverage only on carefully selected investments, not on the overall market (I might change my view if the S&P really tanks).

Yet another reason NOT to buy a house from a flipper:
http://www.msnbc.msn.com/id/14171265/