Historically, the month of January has shown abnormally high stock returns for stocks with small capitalizations. The effect is so large in fact that the return of a security in January may be the largest portion of its annual return. Several reasons have been hypothesized for The January Effect, but the most popular reason for The January Effect is tax reduction tax-loss selling.
Monthly Archives: March 2006
Most people have insurance for their house, car, etc., but what about for stock portfolio management? Yes, it is possible to buy stock insurance for a portfolio of stocks, but don’t call your insurance broker. Personal stock portfolios can be insured using index options, specifically by purchasing index “put” options. In general, as the price of an index declines, the put options for the index increase in value, all else remaining the same. So if the market declines in value, market based indexes will also decline and the corresponding put options will increase in value, effectively hedging or insuring personal stock portfolios against drops in the market.
So you’ve been told you should diversify your portfolio for stock investing, you’ve been told it makes for good stock portfolio management, but how can you know whether one of the potential stock investment strategies you’re considering is aiding you in diversifying your personal stock portfolio. Well, one way is to simply invest in different sectors, like Health Care, Technology, Construction, Financials, Real Estate, etc. But, are Health Care and Real Estate really that diversified? How can you know if you really have a good stock trading strategy?
Earnings warning! Earnings warning! Earnings warning! Some (not all) public companies when determining they have or will have a shortfall in earnings compared to previously forecasted earnings may issue an earnings warning. The stock price for a company issuing an earnings warning can be dramatically affected as a result of the warning.
The Strike of Pain is the strike price with the lowest In-the-Money value for both calls and puts on a given stock for a given expiration date. This is the strike where the long option traders will lose the most money and the short option traders will gain the most value. The Strike of Pain is calculated by taking the open interest of the various In-the-Money strike prices multiplied by the amount that the call or put is ITM. The ITM values are added together, and the strike with the lowest monetary value is the Strike of Pain. The Strike of Pain calculation is based on the theory of Max-Pain(tm) developed by BCA Software.
You might ask, “what does probability have to do with option investing?”, and the answer is “a lot”. The probability of having a safe flight on an airline is better than 99.99999%, and the probability of a safe automobile trip is 99.98%, and generally people feel safe flying or driving to their destinations. But if the probabilities for safe flying and driving were significantly different say 95%, people might not feel so safe flying and driving, and rightly so.
To be a successful option trader, an investor naturally has to pay attention to the prices of options. It is not enough to merely watch the option prices, selling when the price is up and buying when the price is down. Informed options investors will study and analyze their positions based on the Greeks. The Greeks are the indicators of how an option moves based on the outside components of the option.
OK, so you notice a statement regarding a potential investment that says, “our strategy has been back tested”, and wonder what does that mean. Very simply, back testing is using historical data to determine the results of an investment strategy had it actually been applied in the past.