Larry1234

Folks are invited to discuss about Chinese economy, currency and their relationship with us. If china is a bubble, will it impact us or not ? I recently came to know that China is back in the news. A new video from CBS 60 min shows ghost towns in China... Analysts are talking about the biggest bubble in history! Is China a bubble? We don't know. Does it matter? Well...yes...maybe. If China melts down or blows up the demand for oil and other resources goes down. The Chinese have pumped billions into development projects. That money helped to keep people on the job...and also kept the ships full of stuff, going back and forth across the worlds' oceans. Trouble in China is trouble everywhere - particularly in Australia (which has been selling itself by the ton to the Chinese) and in Europe (which sells its precious, high-touch products by the boatload). Drive around Beijing and you see German autos, Italian shoes, Swiss watches and French perfumes. But hey...why worry? The Chinese can print money too! When China does something, it tends to do it to excess. That's why there are so many empty buildings in the Middle Kingdom and why it might have created the biggest bubble in history. China overdoes it when it comes to central bank stimulus measures too. In fact, no central bank has done more than the Bank of China when it comes to pumping up the economy. And investors know it. That's why bad news for China...like bad news for the US economy...could be good news for the stocks. The feds will pump more money; stocks will go up! Isn't it so easy ?

Hello everyone, I have started this thread to talk about regarding the markets (basically S&P 500 and Dow Jones Index) movements in the month of March. What do you think where will it move northwards or southwards ? In my opinion, since U.S. stock futures are higher and pushing the S&P 500 up to make a fresh challenge on its all-time highest close and for the Dow Jones to continue its record run. I see the market to move in northwards in march. Do you ???

I totally agree with you regarding trading in futures comparatively easier than Option and Forex. But I made a point regarding the differences in a futures price and forward price. From the Corporate point of view, they generally prefer forward contract compared to futures contract because the terms of forwards contracts are negotiable where as the futures contract are standardized.

There is no doubt about Futures that they are better than forwards but most of the time Futures prices are also higher than forward prices. Don't you think that there is a trade off between price (high in futures) and risk (high in forwards) ?

Adding to your point, Options are really useful for hedging. If the trader has the knowledge of option Greeks (mainly delta and gamma) then they can use the same and easily manage their risk and return profile.

This thread is created to discuss the basics of options. Lets talk more about this. I am awaiting the comments of option experts in this thread.

Discounted Cash Flow is one of the method to do the valuation. I generally read analyst recommendation to take a call but I also do valuation at my own. It is not possible to do the valuation for each and every company, so I also read analyst recommendation on the companies which I am not covering.

Let me first define the following - Fundamental Valuation means valuing the company using its fundamentals i.e. the financial statements of the companies. Relative Valuation means valuing the company by comparing the price to its peers. e,g. If 'x' is trading at a P/E multiple of 10, then the company 'Y' (which is in similar business line and having same growth & Capital structure as 'X') should trade at a multiple of 10. This is relative valuation. Discounted cash flow valuation is a technique to identify the intrinsic value of the company. It is a valuation method comes under Fundamental valuation. Intrinsic value means the present value of all future cash flows to the company or this should be the actual price of the company. If the current market price is higher than Intrinsic value, then we can say that the stock is overvalued and vice-versa.

Requesting you to let us know the impact of these reports on options.

This thread is for those who like to discuss about the Fundamental Valuation (Relative valuation / Discounted Cash Flow valuation) of stocks listed on NYSE. I am waiting for your thoughts in this thread and their usefulness in trading. We all know valuation is done by Research analyst and if the current market price is below (above) than the Intrinsic value of the stock, then the stock is Undervalued (overvalued) and we do the trading accordingly. Awaiting more inputs to this thread so that it helps in trading decision making. Happy Learning

I agree that using Greeks in options helps us in improving the performance but we know that Greeks are changing continuously that is why it is really difficult to apply them in decision making.

F&O stands for Futures & Options.

When you talk about volatility of the option contract, it is measured by Vega which is one of the Option Greeks. Option Greeks plays an important role in determining the theoretical price of the option and the changes in option price w.r.t changes in prices of Underlying Assets, Time to expiration, Risk free rate (interest rate) and Volatility of the stock.

What I said about option greeks is theoretical. As you rightly point out that the Greeks move constantly, so it really help us in making strategies and managing our position by reducing the exposure. If you don't know how to read the dashboard of a car and you are driving the car then I think you are putting yourself into danger zone. Similarly, trading options without the knowledge of the factors which affects option pricing is a similar to one (like a car example). That is why more than 80% of the traders loose money to experts.

I agree with you and would like to add more. Option Greeks allow option traders to objectively calculate changes in the value of the option contracts in their portfolio with changes in the factors that affects the value of stock options. Options greeks help traders to hedge their portfolio or to construct positions with specific risk/reward profiles. So the importance of Option Greeks is priceless in options trading. For the amateur trader, knowing the delta of their options position is the most important as it gives them an indication of how their option's value will change with movements in the underlying stock price - all other variables remaining the same. Knowing your time decay i.e. theta gives an indication of how much time value your options trading position is losing each day - all other variables remaining the same. Apart from this, Professionals also use the Option Greeks to measure exactly how much they need to hedge their portfolio and to surgically remove specific risk factors from their portfolio. The Option Greeks also enable the measurement of how much risk the portfolio is exposed to, and where that risk lies.

All else being equal, with the help of greeks, we can easily formulate better option strategies and can make arbitrage profits.

I guess you have interpreted wrong my friend. I made the comparison between stocks and Derivative market. Before answering the question, "Do stock market really create wealth" ? Let us first understand the nature of stock markets. A stock market is a place where people can buy and sell their shares in companies. The price at which they buy and sell is determined by demand and supply of shares at that point in time. In other words when marginal demand for shares is plentiful relative to marginal supply, prices will rise and vice versa. The key to stock market prices is marginal demand and supply. People who buy and hold shares for the long term ensure that marginal supply does not increase thereby keeping a floor under prices until they decide to sell. As long as buy-and-holders keep buying, we can safely assume a rising floor for prices. Once they decide to sell, the floor collapses. Company profits have a role in influencing stock market prices i.e. in attracting people to buy the company’s shares. A company with a long track record of rising profits attracts a large number of buy-and-holders thereby reducing the stock’s marginal supply while simultaneously increasing marginal demand which effectively raises the price floor. Profits may be real or created by accounting manipulations. Both have the same effect on stock market prices. Unfortunately, people forget that a track record of rising profits (either real or illusory) is unsustainable and has to break at some point in time. Profit disappointments cause the price floor to break. Once broken, it is near impossible to stop from going down significantly at a pace determined by the buy-and-holders. Real profits erode slowly while accounting illusions disappear rapidly. Hence the decline of really profitable companies is slow whilst it is rapid for those companies whose profits are illusory. Wealth is measured as an increase in nominal net worth. As long as stock prices rise, your wealth increases while it decreases when stock prices fall. It is clear that you have exit at the right time for your wealth to sustainable increase. Exiting at the right time requires a lot of ability and luck. There are investors who have held stocks for decades and have generated tremendous wealth just by holding on to those stocks. The key reason for this growth in stock market wealth is the massive increase in money supply. As long as money in the system remains constant, price rise in one stock is usually accompanied by fall in another as money to buy can be generated only by selling. This would ensure that the market cap of the stock market remains constant. But if money in the system increases, buying can be done without selling thereby raising the overall market cap. Unfortunately, we have lived in an inflationary world for so long that people have come to accept it as a natural reality rather than a political choice. This has lead to the belief that stock markets always rise in the long run and equities generate tremendous wealth. But on the other hand, Derivatives never generate wealth. I hope this is clear.

I would rather say its always better to trade a basket of securities rather than an individual stock if you are risk aversion investor / trader because the risk is diversified in basket of securities and you can easily earn above average return.

The analysis seems to be good. But according to you, what is the target price for this stock by march ?

Let me explain you in simple words, Suppose you have bought the Apple's one share 10 years ago at $10 and you sold the same after 5 years down the line at $20. You made a profit and its natural that somebody has bought the same from you at $20 (5 years ago). Now the current market price is $30, then he can sell the same and can make a profit. In this sense wealth is created in stock market, not in Derivative market but it depends upon the company's performance and how much income they are generating and their growth prospects.

We all know that all greeks are basically how sensitive is option price w.r.t to Underlying assets value, Risk free rate, time decay and volatility. I just wanted to know whether the traders are actually using them to formulate trading strategies ? If yes, then how ? e.g. always sell options with high theta compared to low theta ?

Comparing Bull call spread vs Covered Call Strategy - Adding to your point, I would like to say that you are assuming that there are no dividends and most importantly, traders generally prefer bull call spread instead of covered call because of lower investment. Both the strategies can be used when the traders / investors are moderately bullish. Break even point is - For Bull Call Spread - (90 + 7.50) = $ 97.50 For Covered Call Strategy - $ 96 At the expiration, if the stock price decrease below the above level, then the traders will start making losses. We should also consider break even price while entering the contract.

I guess none of the member is interested to discuss about option greeks but I would say these option greeks really play a vital role in option trading and helps in creating effective option strategies. Lets us discuss about these greeks in this thread more.

Thanks a lot for sharing the video.

Alan, Thanks a lot for the info. Larry