Jack Dreyfus- Two Rules

JD: I had two rules. One was not to pound the table because if you pound the table and say, “We have to do this or do that,” you put yourself in the position of not being able to retreat because you’re too proud to let go. You have to be able to cut your losses!

The second rule was to treat your investment money as if it is your mother’s money — not someone else’s mother’s money! I thought that if investors thought of it as their mother’s money they would make decisions based on their own best instinct, rather than listen to stock advisors or others.

How to read options values and prices?

How to read options values and prices? September 1, 2006

Unlike stocks, options have an expiration date. Unless a company goes bankrupt or buys back all its stock, the stock investor always has the choice to wait for a price correction. Sometimes that wait represents the triumph of hope over experience, but more on that elsewhere.

That expiration date makes calculating an option’s value more complicated, but also more accessible to some of the powerful statistical tools developed over the last few decades.

Two of the more common methods for evaluating options involve measuring their intrinsic value and their time value.

The ‘intrinsic value’ is the amount by which the option’s strike price is ‘in-the-money’. Strike price is the contractually set price at which the underlying asset would be bought or sold, if the option were exercised. ‘In-the-money’ means the strike price is lower (for a call option) and higher (for a put option) than the current market price.

For call options: IV = Asset Market Price – Call Strike Price

Since options have an expiration date, but are purchased on some prior date their value changes as the expiration date nears. That change in time results in a decay of the value of the option as a trading instrument.

An option with two days remaining is generally worth less than one that gives the investor three months to act. At expiration the option is either in-the-money, in which case profits are possible, or it’s out-of-the-money and the investor incurs a potential loss.

Time value is the amount by which the price of an option exceeds its intrinsic value.

For call options: TV = Call Premium – Intrinsic Value

[For put options:

IV = Put Strike Price – Asset Market Price

TV = Put Premium – Intrinsic Value

Note: The ‘premium’ is simply the cost of the call or put.]

For options that are ‘at-the-money’ (strike price = current price), or ‘out-of-the-money’ (strike price higher/lower (call/put) than current market price) the option has no intrinsic worth at that time. It only acquires value in so far as the market price can change, i.e. it has only time value.

For example, suppose MSFT (Microsoft) has a current market price per share of $27 for a June 30 call. The ‘30′ refers to the strike price, not the expiration date. If the premium is $2, the option is out-of-the-money - since: $27 - ($30 + $2) = -$5.

I.e. if you bought the call and exercised it immediately you’d lose five dollars (plus commission costs).

Since, the option has no intrinsic value (negative intrinsic value isn’t allowed), why would anyone execute such a trade?

Because an out-of-the-money is less expensive than one in the money and the further out-of-the money the cheaper it is. There are many trading strategies that utilize this fact as a hedge or for potential profit. Given a three month period, the market price may well rise to more than cover the premium and produce a profit. That’s what makes option

Timeout Discussion:

Timeout Discussion:

no more ill advised shots: shorting leadership names, speculating heavily, reactionary bets.

Too early to take 3pts....march is not here yet and not playing with the houses money yet so run that motion offense.

avoid turnovers: no need to rush down the court with out a set offense... focus on quarterly bets ....if not sure pass the ball or sit on the sidelines. Very costly.

Stay calm in full court press: see how long the press will last and lets slowly break it up.


Go to the big man inside: focus on large cap less beta names just to be invested and take higher parentage shots.
Focus on defense: gotta play both side of the court...when shots are not falling and you are in a whole you gotta start with strong/focused defense. keeps you in the game.

Sep- market view: Searching for Extremes

Looking to exploit extremes:

Lack of extremes can perhaps explain the challenge of market timing.

Themes and sectors:Tech and Consumer have favorable odds for recovery. Managers "gotta" play these names to get a recovery mileage. And sensible odds/valuation or even oversold plays.As for rate sensitive themes....Banks/Brokers: any upside move should provide advantageous short opportunity:

(BKX- has been working since OCT 05). Not cheap by fundamental standards.
An area of high interest is shorting banks; specifically RKH Index has failed into key rally into key resistance. Tops for the year: May 5 and August 4 again at 155 level.Highly satisfied with mortgage related shorts since this summer:. NEW - short, CFC- weakness, Now brokers like LEH/MS - mortgage exposure can hurt here in the near-term. -- Cover shorts as consensus mania is stepping in.Shorting housing stocks might be overdone from a logical perspective. But psychology little bit left in some areas.NFI- broke down on signifivatn volume, any strength can be shorted. Crude:
USO (crude etf)short on near-term strength. Although, a cycle winner since 2003, further pullbacks are needed.
Interested in a seasonal play -Any upside move caused by hurricane fears can be exploited by shorting further strength above $72.

JBLU- an inverse play of shorting crude. Attractive risk/reward here with a $10 exit.Overdone shorts? / Value Traps:

Certainly not thrilled with the odds of shorting here than homebuilders or some restaurants.Finally, sticking to the game plan of exploiting extremes not much offered on the table. Not many extremes offered in the market place. And sitting on the sidelines appears attractive here for few weeks.
Again, the lack of extremes can perhaps explain the challenge of market timing.