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Posts Tagged ‘learning about options’

A Win-Win on the Million Dollar Silver Bet

If you have been following my blog at Options Dude, I shared an interesting story about a million dollar bet on the silver ETF (SLV).  Essentially, a large trader purchased 100,000 July 25 put contracts on SLV for 10 cents each.  Since each contract represents 100 shares, the trader was wagering $1 million dollars that the price of silver would fall.  This occurred as the price of silver was trading close to $50 per ounce.

Well, today is expiration day for those July contracts, and as I explained, both parties in this trade won.  Whoever sold the puts collected one million dollars for insuring against a collapse in the price of SLV.  Put contracts serve as insurance for stocks (I will be explaining more about options in later posts and on a new site).  Since the price didn’t fall below 25, the seller of the put options is no longer under any obligation and the contracts have expired.  The seller gets to keep the premium.

The buyer of the put contracts likely also won as well.  Shortly after the purchase of the puts, the price of silver began to decline and actually has traded down into the mid-30’s.  Even though the price didn’t reach 25, the value of the puts increased from 10 cents per contract to as much as 30 cents per contract that I saw.  So the buyer of the puts could have sold them for a $2 million profit.  As you can see, both parties won.

So Who Loses?

It would seem that for every winner, there must be a loser.  Money can’t be created out of thin air, unless you are the Federal Reserve and United States Treasury.  And you would be right.  The difference is that in this case, there are likely several small losers.

It would seem that the traders involved in million dollar transactions represent big money and smart money.  On the other hand, someone had to purchase all those puts at 30 cents that the original buyer got for 10 cents each.

The likely scenario is that the financial media attention for such a large trade got some people to thinking that maybe it would be worth a small bet on the same trade.  Maybe they saw the silver price start to collapse and thought that it would decrease to 25.  To them, it might be worth spending 30 cents each for 100 contracts or $300 for a lottery ticket.  All it takes is 1000 greater fools and the smart money has $2 million profit.

So options become risky to 1,000 individuals because they lost money.  It is not that options are necessarily risky, it is that the individuals were uneducated, unexperienced, and lacked a true plan for investing.  They were throwing darts at lottery tickets and lost.  Plain and simple.  That is no way to trade.

Thinking Like a Pilot

I am not a pilot, but I know several.  I also know that you don’t jump right into a 737 and begin flying.  You start out in class and learn some things first.  You learn about the physics of flight and terminology used to communicate with other pilots and aviation professionals.

You learn about safety and begin flying in a single engine plane in daylight under visual flight rules with individualized instruction.  You practice take offs and landings.  Only after sufficient levels of experience and passing certain requirements are you able to move on to instrument flying, night time flying, and multi-engine aircraft.

Putting me in the cockpit is risky not to mention suicidal.  And maybe options trading for you is risky.  But options themselves aren’t risky.  They are certainly less risky than flying.  I know that I won’t die trading options.

People simply refuse to take the time to learn about and practice trading and investing.  The same holds for real estate or stocks or precious metals.  Individuals simply don’t take the time to educate themselves and learn about what they are doing with their investments.  The information is out there.  Their are willing mentors.  I urge you to find someone you can trust and who has the experience and willingness to teach.

I will be starting a new blog entitled at OptionsDudeAtoZ.com.  It will be a complete tutorial on options, one post at a time from a self-educated but passionate everyday individual who simply loves options and sharing his knowledge.  Feel free to learn about options trading and know how to trade options safely.  We will be starting at the very beginning with a single engine.

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8 comments - What do you think?  Posted by Cash Flow Mantra - July 15, 2011 at 4:00 pm

Categories: Investing   Tags: , , , , , ,

Be Ready for More Posts on Options Trading

I am coming out of the closet, so to speak.  I am sure many of you have figured out that I have another site with a blog attached called Options Dude.  I you hadn’t figured that out or really didn’t know, you know now.  In fact, you can read my latest posts by clicking on them in the sidebar to the right.

My original intention was to have a somewhat static site on options and options trading.  I have been trading options in my retirement account since 1999 and have read over 12 books solely on options trading not to mention many others on stocks and stock trading.

I am not a professional trader but can offer lots of practical advice since I have made almost every mistake possible.  If I have been able to learn from only half my mistakes, then I have a PhD in options.  As one who is interested in knowledge and education, I would love to share anything that I can.  I also hope to learn from anyone who might care to share as well.

That was the original goal with Options Dude.  However, I am finding that I am enjoying the WordPress and blogging format much better than the static site I started and have hosted at Weebly.  Instead, I have been using the site more as a blogging platform to share some of the trades in my retirement account and add some commentary on other aspects of trading options when the spirit moves me.

There has been some interest by some of my readers in learning about options and options trading so I would like to pose the following question to a larger audience:  Would you be interested in an options tutorial blog that would essentially start from square one and work all the way through some of the more advanced topics?

It would take me quite a bit of time to sit down and organize an outline and develop a curriculum.  I would do this first and begin posting one topic at a time but could also put all of the posts together in a nice coherent e-book.  So my second question would be:  Would you be willing to pay a nominal fee ($0.99-$4.99) for an e-book on options?  What would be the sweet spot for pricing?

Please feel free to comment.  If there is enough interest, I would begin working on an outline, get a domain name, and start working on some posts.  I can tell you that the design wouldn’t be the greatest, but you would learn a lot about options.

Even if I don’t start a new blog, get ready for more posts about options.

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28 comments - What do you think?  Posted by Cash Flow Mantra - July 10, 2011 at 12:00 pm

Categories: Investing   Tags: , , , ,

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