Mark Carney warns of complacency in financial markets

Thrugelmir

MFW_ASAP wrote: »

I jumped on the Tesco shares because I felt they were oversold.

That's what makes a market. I'm down 63% on a share I thought would rise! There's no accounting for unforeseen events.

Personally I'm nervous about Tesco's. The £16 billion of off balance sheet liabilities that will come on board the balance sheet in 2016 when new accounting rules come into force. Will certainly shake the trees. Then I may consider buying as personal investors are bound to bail out.

wotsthat

Generali wrote: »

You can trade options through your SIPP. If you want to make a similar trade to what you're doing you can buy a call or a put option 'at the money'. Just watch for liquidity: it should be fine to trade Tesco like that but Resolution perhaps not so much. The spread will show you what liquidity is like.

How does that work in practice?

How would you use an option trade to take a, say, the equivalent MFW£70k punt on Tesco? What are the advantages?

I trade Rio and have done quite well as it goes up in price and comes back down on a regular basis but I'm paying stamp duty each time which reduces profits.

AndyGuil

As much of the world economies slip into recession and struggle to have positive growth this will keep rates low for a long time. There will be a charge towards stable currencies and then towards physical assets (gold, houses etc..) but this will have no effect on interest rates.

Generali

wotsthat wrote: »

How does that work in practice?

How would you use an option trade to take a, say, the equivalent MFW£70k punt on Tesco? What are the advantages?

I trade Rio and have done quite well as it goes up in price and comes back down on a regular basis but I'm paying stamp duty each time which reduces profits.

Let's say that you think Tesco is oversold at 192p per share and you think this is going to rise in price. You might decide to buy American-style Call Options with a Strike Price of 195p. That gives you the right, but not the obligation, to buy 1,000 shares at a 'strike price' of 195p at any time that the market is open between now and 17th November. The cost of a contract is £37.50 at the time of writing and gives you exposure to something under £2,000-worth of shares. To gain exposure to about £70,000 of shares you'd need to buy about 35 contracts at a price of about £1,300.

You now have 3 advantages and 1 disadvantage over buying the shares. The advantages are you've just saved yourself £350 in stamp duty and instead of risking £70,000 you've risked £2,450. When you buy an option, all you can lose is the option premium. Also, compared with the position when buying the shares, you have an extra £68,700 in your pocket that you are earning interest on or which you can invest elsewhere.

The disadvantage is that if you buy shares you own them until you decide to sell. If you don't 'exercise' your option then it becomes worthless at 4:30pm on 17th November. You could always buy a longer dated option but that will cost you more.

Bear in mind there are 2 styles of options, American and European. European-style options can only be cashed out on the final day of the option whereas American-style ones can be cashed out any time.

The example above is for a call option. If you think prices are heading South you can buy a put option. They work in exactly the same way but they give you the right, but not the obligation, to sell shares at a particular price.

I've just looked at options that are 'at the money' (i.e. the strike price is about the same as the market price). You can also buy out of the money options, where you are effectively betting on a bigger rise/fall in price. For example you might buy some call options with a strike price of 210p. With the current share price being 192p you need a fairly substantial rise in the price before you make money. The options are cheaper as a result.

Similarly you can buy 'in the money' options. Sticking to the Tesco example you might pick options with a strike price of 180p. Wayhey! You've already made money, right? Ah, no you haven't. The extra value of the option is locked into the option premium you pay.

Some brokers have a free calculator to let you play with buying options until you are used to what you are doing and I would very strongly recommend you do that. Also, make sure you understand exactly what you are doing before you buy. Options aren't very complex but you can easily get carried away or just do something stupid. Caveat Emptor.

Finally be more wary of selling options. That can be a great way to make some extra money on a portfolio especially on high yielding shares but they are a bit more complicated.

Money made on option trading is, as far as I am aware, subject to CGT. If you were to trade them enough then they'd be subject to income tax I guess as you'd be deemed to make your living as an option trader.

wotsthat

Interesting. One big advantage of options trading is that you seem to be able to avoid holding shares that haven't performed as you predicted. You just pay the option premium and don't have to agonise about when to crystallise the loss.

That seems to be the biggest disadvantage of what MFW is attempting to do. Great if you make a couple of good calls but what happens if it goes the other way? Sell and take the loss or wait for the price to recover?

Generali

wotsthat wrote: »

Interesting. One big advantage of options trading is that you seem to be able to avoid holding shares that haven't performed as you predicted. You just pay the option premium and don't have to agonise about when to crystallise the loss.

That seems to be the biggest disadvantage of what MFW is attempting to do. Great if you make a couple of good calls but what happens if it goes the other way? Sell and take the loss or wait for the price to recover?

If you want to trade shares in the way MFW suggests then at least out some risk mitigation in place. The bare minimum you need is a stop loss: an automatic instruction to your broker to sell if prices go against you by more than a certain amount. If prices fall fast you won't always get out at the stop loss price but it's still highly recommended.

Trading a la MFW is highly risky and extremely unlikely to make you money long term.

purch

Generali wrote: »

Trading a la MFW is highly risky and extremely unlikely to make you money long term.

When you are Walter Mitty you don't need to worry about reality.

Aberdeenangarse

purch wrote: »

When you are Walter Mitty you don't need to worry about reality.

I thought it was Renotitty

mayonnaise

Aberdeenangarse wrote: »

My Portfolios up 4% since he started that thread.:rotfl:

MFW_ASAP wrote: »

Is your portfolio really up 4% since I made my call? Your shares must be paying some serious dividends. Who are are invested with?

Anything? No? :rotfl:

Aberdeenangarse

mayonnaise wrote: »

Anything? No? :rotfl:

I don't have to justify my Investments to a known fantasist, and certainly not to the Forums resident idiot.;)