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Barron’s Striking Price columnist Steve Sears is out with a new book called The Indomitable Investor.
The book is a rich discussion about how the market and its participants are oftentimes at odds with one another, and the latter usually paying a hefty tuition bill.
Sears best quote from the book goes a long way to describing why that is the case: “Bad investors think of ways to make money. Good investors think of ways to not lose money.”
Here is the podcast that we recorded and in which we discuss the book and several other provocative ideas such as Warren Buffett, Apple (AAPL), the downside to too much social media, and the value of being skeptical of everything.
Read my article about the book To Invest Like Warren Buffett, Learn How To Sell at the Huffington Post.
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I spoke with Jon Najarian about the markets today, as well as his upcoming education event in Newport Beach, CA in late March. What you can read below is a more in depth analysis of what we spoke about, plus it’s admittedly hard to envision the mechanics of option spreads, hence the pictures and graphs.
Register now for the Invest Like a Monster™ option education conference.
(click for larger image)
In the podcast, Jon mentioned right off the top that he’d shorted a Put around 1355, the Strike Price of which is indicated by the red line. His thought process was that the market opened weak and had had a tendency to rally at the Open. Selling puts is a bullish strategy and Jon used the weekly put contract as his vehicle of choice for this Day Trade.
As the rally extended Monday, the value of having the ability to sell the S&P 500 at 1355 would decrease. That value is expressed in the option’s premium, which Jon purchased back at a lower price much later in the day keeping the difference.
One trade that I taught to some of my students last week is the Credit Put Spread on AAPL (see below). It’s technically called a “Net Credit Vertical Bull Put Spread.”
(click for larger image)
Here, we sold the March 500 Strike Price for a $9.80 credit (the top red line) and against that we bought the March 490 Strike Price for a $6.70 debit (the lower red line). The Net Credit of $3.10 is our Max Gain on the trade and we make that if/when AAPL remains at $500 or higher (which is what we expect).
Break-even is $496.90 [$500 - $3.10]
Max loss is $6.90 which traders will incur at $490 or below
Spreads are hedged. That’s why you trade them. Sure you can sell the March 500 for $9.80 and you might get away with keep the whole thing…once in a while. However, I think Victor Niederhoffer demonstrated the brutality of being short naked Gamma overnight.
Here is the margin calculation, courtesy of CBOE:
(click for larger image)
Jon and his brother Pete, Guy Adami, as well as Anthony Scaramucci and Jeff Macke will be in Newport Beach, CA for their next education conference. These guy are solid citizens and they’re great to hang with besides being great instructors.
You can register now for the Invest Like a Monster™ option education conference.
As he mentioned in this interview, Jon and I spoke at the Milken Global Conference in Beverly Hills in May 2011. We also talked about being short options overnight. “Seller beware…”
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Jared Dillian
Aaron Brown
Michael Martin
I’ll be speaking with Aaron Brown and Jared Dillian at Columbia University Monday, February 13 at 6 pm.
Information on Financial Engineering Semiar
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I got to spend a little time with Gotye while he was in Los Angeles last week. I filmed about 30 minutes worth of an interview. Will have it up shortly.
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Jared Dillian’s brain worked very differently from most of his colleagues. He had what I’d call these emotional tectonic plates inside his head that would shift in an instant. When they shifted, they’d tremor so hard, they’d make the fault lines along the San Andreas Fault sit up straight…and that’s not counting what happened as a result from his trading.
Dillian describes his personal journey in one of the most revealing memoirs I’ve read in the past decade. He is a very genuine person and his recent book Street Freak: Money & Madness at Lehman Brothers is written with a great deal of candor. I recommend you read the book — it’s written with a great deal of honesty and you can hear it come through in the podcast.
“Throughout most my adult life, I’d always felt that I experienced things differently from other people. I felt more. Instead of getting sad, I would get really sad. Despondent. Instead of being happy, I would be delirious. I would laugh, and everybody would turn around to look at the crazy man. Now here I was, crying in the middle of Seventh Avenue. But there was no reason for the crying. I was just walking down the street, and I fell to pieces.” – from Street Freak
Dillian is the publisher of the Daily Dirt Nap Newsletter, which continues the success of the market letter he wrote for his clients over the Bloomberg while at Lehman.
Jared, Aaron Brown and I are speaking at Columbia University on February 13, 2012 for an event called the Financial Engineering Practitioners Seminar
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