Tag: options

Buffett’s $1 billion bet on a basketball contest

We had discussed how an options trader can think of himself as The One Man Insurance Company (TOMIC.) Now Warren Buffett has gone out and insured a $1 billion basket ball contest.

The contest

The National Collegiate Athletic Association’s (NCAA’s) tournament consists of 63 games. A contestant who accurately predicts the outcome of each of those games wins $1 billion. The contest is sponsored by Quicken Loans. Warren Buffett’s Berkshire Hathaway has insured the prize money.

The ods

A blind guess has a one in 9.2 quintillion chance of winning.

If the average person submitting a bracket had a 78.6% chance of getting each game right, and the maximum 10 million people sent in their brackets. What is the likely number of correct brackets? One.

Buffett keeps the premium

Aleph Blog:

Every tournament has significant upsets. Someone who has a good understanding of how good the teams are will know how to pick the most likely team to win. It is tough to pick the upsets, and tougher to pick all of the upsets. There is no good model for upsets, or they wouldn’t be upsets.

 

This is the proverbial “fat pitch” of options trading. The chances of winning are so low but the payoff is so large, that both the option buyer and the option seller can agree on a reasonable premium and get the deal done.

Sources:

Tough for Buffett to Lose this One
Warren Buffett Bets $1B You Won’t Pick Perfect NCAA Tournament Bracket

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The One Man Insurance Company

I am recently reading a book bombastically titled “The Option Trader’s Hedge Fund” (Amazon). In that the author says that the best way to look at option trading is to think of it as an insurance business. So if you are an options trader, you should think of yourself as The One Man Insurance Company (TOMIC).

TOMIC

It sort of makes sense because what you are doing when you are trading options anyways? You are buying and selling insurance of some kind with different co-pays and terms. If you are hedging your positions then you are “reinsuring”, etc.

The chapter on volatility was insightful. It discusses the impact of ATM options price in the near term, volatility skew, and term structure on implied volatility. Its a useful framework to have.

Overall, its an interesting book that’s worth a read.

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Algorithms At Work!

The last few weeks have been brutal to cash-only equity investors. The NIFTY has gone nowhere even while swinging wildly on a daily basis. Is there a way to turn a profit given what has been going on?

Yes! With the help of option strategies it is possible to profit from stocks you expect to go side-ways. Here’s what we did.

ACC technical analysis chart

StockViz Option Ideas drew our attention to the ACC Long Call Butterfly around the 10th of December. The stock was under a pennant formation, and was on a decline from its 5 day high of Rs. 1445. With Bollinger bands enveloping 1450 and 1360 levels, there was a strong possibility that that stock was going to be range-bound for a bit.

We entered a long call butterfly trade for December expiry. With an outlay of Rs. 26,750 we bought 5 contracts (market lot of 250).

ACC long call butterfly trade P&L

The payoff chart for our butterfly looked something like this:

ACC long call butterfly payoff

With ACC ending at Rs. 1402 at option expiry, the position made us Rs. 9,950 (38%) profit in just 17 days even as equity holders sucked wind.

Here’s what your New Year’s resolution should be:

KEEP CALM trade options

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[stockquote]ACC[/stockquote]

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Quantitative Option Strategies

The markets have been all around the place in the last few week. And this has created a lot of confusion in the minds of traders too. So, how do you make money in such scenarios?

The best way to be in the markets right now is to get exposure in the derivatives market. Here are a few options trade that made 33%, 19% and 7% when the markets went nowhere last week.

 ACC options position

LT Options position

BATAINDIA Options position

Even when the respective stocks were -1%, -2% and -3.3% there options position have made much more profits.

The ideas based on the algorithms helped us take these positions and carve out the profits even under such market conditions. You too can use these ideas to get more greens in your portfolio.

Open a StockViz Demat account today and go Pro!

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