Futures, Forwards, and SPOTS: How the World Can Trade Pork Bellies Without Ever Touching a Pig

Confession: I normally don’t do much research outside of options and long stock.

Not because the other platforms are some terrible place where people are yelling about pork bellies and soybeans, but simply because I don’t really understand it.

So to make up for admitting my weaknesses in finance on my finance blog, I decided to learn.

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Trading Naked: How to Cover Your Assets

I recently had a conversation with a good friend of mine. Our friendship blossomed when he talked about puts one day in our Applied Investments class. My head whipped around to locate the person that was finally speaking my language, and once we did the options trader secret handshake, we became fast friends.

One of our more recent conversations surrounded the economics of options – He said that basically, if you’re on the sell side of a naked option, your margin requirement (collateral) is going to be pretty high.

But I disagree.

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Trading Options: Deriving the Value of a Derivative

One of the biggest questions that I get asked is: “What’s the point of trading options?” I give the usual spiel:

  1. Reduce your cost-basis (how much you pay for a trade)
  2. Increase your profitability (the chance you have to make money)
  3. Increase the number of trades you can make, putting the law of large numbers in your favor
  4. Place neutral, bullish, or bearish trades on the market
  5. Thus, you can make money when the market goes up, down, or all around
  6. Use math and probability to make money
  7. Take control of your financial future
  8. And have fun! 🙂

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The Relationship Between Oil and Credit Markets

What happens to the bond market when the oil futures move?

Crude oil has hit almost a 5-year low, dropping down to $42.74 a barrel. The movement comes from output increases from resource-rich countries of Nigeria and Libya, who are unrestricted in how much they can supply.

There are signs of rising production all over the world, with futures moving into bear territory due to the simple law of supply and demand. The more oil there is, the lower the price is.

It’s like candy. If you had 1 piece of candy, and 100 customers, you could sell that piece of candy to the highest price the bidders chose. However, if you had 100 pieces of candy and 1 customer, you would have to bring your chosen price down to match that to the expectations of your customer.

Supply and demand.

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Delta and Theta – How to Manage Your Risk

Delta is an estimate of the amount of gain or loss with a 1-point change in underlying price. Standard deviation works into this mathematically as a normal distribution. A delta of 16 correlates to 1 standard deviation away, a delta of 32 correlates to 2 standard deviations away, and etc.

The best way to look at the risk of your portfolio is to analyze the SPY Beta Weighted Deltas. This summarizes the movement of a portfolio considering a $1 move in the overall market.

So for example, if we had a portfolio beta of -90, the means for every up-movement in the SPY, we would see a loss of $90  in our portfolio.

It’s best to have a balanced portfolio, and make sure that your beta isn’t ridiculously high or low. I like to keep my portfolio beta in the negatives, since I am bearish on the market. (Contrarian forever)

However, in the current atmosphere, it seems as though it would be beneficial to have a positive beta. That way you could benefit from these crazy upmoves and perhaps take your profits and run before the market completely collapses.

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