Friday, February 09, 2007

Read Away!


I've been spending most of my time reading market books and studying different strategies that have been written on how to trade the markets. One I just finished is, Options Made Easy by Guy Cohen. He basically goes over a lot of option strategies, and tells you the ones in which the risk/reward ratio is unfavorable. He specifically state which strategies he wouldn't implement and I now see why. I personally am warming up to the collar strategy & spreads, I like the reducded risk profile without sacrificing potential reward.

One thing that is most vague when it comes to published articles is, arbitrage. You see the definition is, "a kind of hedged investment meant to capture slight differences in price; when there is a difference in the price of something on two different markets the arbitrageur simultaneously buys at the lower price and sells at the higher price."

The one thing you'll never find out is who is doing it and where because the secret and the profits lay in the exploit itself. Of course I published a post last week regarding 1Option's neat article about buying options and then shorting stock creating a risk free trade in which market making firms execute to make money.

But there is more to it....I realized that I had indeed participated in a type of arbitrage a few years ago while in college to make money. Arbitrage doesn't only apply to the stock market, it applies to any field in which you can exploit an inefficiency for profit with no risk. The entity in which I was the arbitrageur was, AOL Instant Messenger Screen Names....I small business trip that lasted for a while and offered about a $3,000 profit for 1 month's work.

While reading, Trade Your Way To Financial Freedom by Van K. Tharp, the book vaguely, and I mean by a hair of a kitten, barely mentions the topic & a brief interview with an "arb guy" named Ray Kelly. He spends his whole life researching and studying markets to try and find arbitrage, and he says time is of the essence and if you can't get both parties to agree to conform to your business objective the profits quickly dwindle away by the second, because that gap will close, and you'll be on to your next venture.

Check out Wikipedia's numerous examples of arbitrage, I especially like the one where you buy a PS3 for $600 and sell it for $30,000 on EBAY, shwing!

I made out nicely today in the futures market profiting from that nasty fall of which I was stalking all day...on the Dow Jones (YM)


A chart & stock I like is NYX:


Yesterday I purchased the RIMM FEB '07 $135 Puts for $1.20 a contract and sold half for a loss yesterday for $0.70 a contract and the other half for $3.50 today, a 191% gain on the latter.

9 comments:

Flatwallet said...

Though you were too busy making money to update the blog. Keep up the good work and thanks for Philstockworld. Just awesome.

Tyro said...

When I traded at Swift, arbing was popular among the top money earners. They found that they could buy equities on the open market and sell them on the NYFIX Millennium darkbook at a different price, reaping insane profits for themselves. Well, $5k-10k on good days which seemed like insane money at the time. It had a problem in that sometime the darkbook would be pulled and they'd have to dump their positions onto the open market and would take massive losses.

Another form of arb at Swift that was making huge money was arbing between the AMEX specialist and the other ECNs. Since the spec would often lag behind, you could take a 20,000 share position with the spec while simultaneously selling 20,000 to an ECN for a penny profit. Do that enough times in a day and you are making good money.

Anonymous said...

I'm gonna have to call bullshit on that YM trade.

For every trade you take on a ma crossover in futures, you will get burned by 10 others.

Anonymous said...

Agree on NYX though.

Anonymous said...

have u ever had a losing trade?

PhiR said...

Good to see some trades from you. I hope you update this site more often in the future. Good read overall.

Rich said...

hi cal check out my blog here for my free trading signals. This last trade should be in the money.

Anonymous said...

cal while i realy appreciate the links and advice i can't help thinking this blog is very low on ur to do list. seeing how often u respond to comments and how few posts is realy disapionting. i do give u props for posting this as i know u will bieng im the guy asking if u ever lost a trade:-)which u posted. cal best of luck, just asking for more frequent responses and posts for ur frequent readers.

Cal said...

when you buy put contracts at $1.20 and sell around $0.75 cents thats a loss, there are always losses in this business that's why it's called capital preservation, not trade you life away hoping to win the lottery, so of course I've taken losses, I get stopped out all the time on trades that don't go my way, but I use high probability trading, MA cross overs, Stochastic, trendline support, macd, volume confirmation, and overall trending of the market. So to answer your comment, yes I have taken losses, and I did mention a loss, maybe you missed it. I more than made up for it when i sold the other half of the RIMM Puts the next day for close to a double, which happens quite often in the options market.