If you had $100,000 in free cash flow every year how would you invest?

[yuppaz]

Also I only trade directional options when I feel I have a solid edge over the public, and not as much with stock because the returns haven'the been there with JUST stock.

 

[synergy1]

My issue with the covered call crowd is that they are trying to avoid having to learn valuation and pricing models for options. I don't blame them for not wanting to have to do so - you gotta be Rainman to understand that sh!t. Black Scholes is like a kindergarten primer, and almost no one really understands it. I don't want to learn it, either, but that's why I would never trade options. I always try to encourage people to not get into options until you are already making money in stocks. It's like trying to ride a motorcycle before you can ride a bicycle.

I have two degrees in engineering which involved studies in Multi-variate calculus/ Differential equations and solving a very similar second order PDE ( The heat equation) to Black Schoels. Moral of the story is that its not really possible to be able to simply visualize something like that without good understanding of boundary conditions and the transients etc. The Black Schoels formula is the same thing.

I decided to take a look at Option pricing models and understand what goes into them. I'll save everyone the time- its not worth trying to explore. People think stocks are difficult because one essentially needs to predict a direction ( long or short). Options you need to get a multitude of factors right - implied volatility, time to expiration, forward price, etc. To get to the point where you might have an *edge*, you'd have to have a good understanding of a probability distribution function ( not just a normal one, but a log-normal). If you can't "predict" the trend of a stock, good luck predicting the distributions of price, or how volatility changes with time to expiration, underlying price etc.

Now I get that one can get programs to model these things, but even a sophisticated library and model is only as good as the parameters one feeds in. Even with practice, it would be hard for someone with moderate understanding of the models and dynamics to get it right.

For me, I think simple option strategies might be good to mitigate risk. Maybe you want to mitigate downside risk of a market index like SPY so you buy puts as insurance. Something where you know the MAX downside, and in the event of a 2011 or 2008, you can insure part of ones portfolio to a small extent. Maybe you want to catch a stock going up, if you are confident by limiting downside, and buying calls could be a simple way to do that. In my mind, getting into it would involve doing the most basic option plays with LIMITED DOWNSIDE. Insure my portfolio for 2,000 - 3,000 dollars, calculate downside protection, as well as what the potential upside is. Anything beyond that is a fools game..

 

[synergy1]

I hear that you need to understand exactly how options are priced etc. I used to trade directional options (did really well during 2008 crash long puts on all bankers, home builders, country fried etc.) Though and it wasn'the a serious issue. I just new the direction in my estimation and bought leaps. But when there is a bull market and you are a directional bearish options trader you can get your ass handed to you. It seems like I should have another strategy for this perma bull like market that our government protects no matter what and doesn't let correct. I was thinking to just sell a couple dollar out of the money puts what a stock hits some support on technicals. Plan to always have enough stock to cover if I get drilled and the stock drops sharply. Anyone trade like this, any advise?

Per the previous post, I an contemplating puts as some downside protection...simply purchasing longer dated ones as you did. Would you mind getting more into the specifics of:

(1) time - The tradeoff is the longer time means longer premium. But this also gives me a better odd of capturing a downside. I have heard the term of rolling options over...what does that entail? Do you do that?

(2) Strike price - Out of the money options are obviously cheaper, but how far out of the money do you go? Is it a calculation based on how much protection on the downside you want? Do you set a dollar amount to put down on purchasing the puts, than focus on the strike prices of the most probably amount of a draw of the SPY?

(3) For buying puts, should I own the underlying? What If I own assets that roughly correlate to the underlying ( such as other stocks?) . I know thats poor risk management, but basically the puts would be an insurance policy against huge draws of the broad indecies.

Clearly I am newer at options and want to keep it very simple here. Thanks in advance!

 

[yuppaz]

Hey Syn

Per the previous post, I an contemplating puts as some downside protection...simply purchasing longer dated ones as you did. Would you mind getting more into the specifics of:

(1) time - The tradeoff is the longer time means longer premium. But this also gives me a better odd of capturing a downside. I have heard the term of rolling options over...what does that entail? Do you do that?

(2) Strike price - Out of the money options are obviously cheaper, but how far out of the money do you go? Is it a calculation based on how much protection on the downside you want? Do you set a dollar amount to put down on purchasing the puts, than focus on the strike prices of the most probably amount of a draw of the SPY?

(3) For buying puts, should I own the underlying? What If I own assets that roughly correlate to the underlying ( such as other stocks?) . I know thats poor risk management, but basically the puts would be an insurance policy against huge draws of the broad indecies.

Clearly I am newer at options and want to keep it very simple here. Thanks in advance!

Hey Synergy,

Here are my thoughts:

1. Yes, the longer the time the higher the premium you pay. also the closer to the "Money" you are (say its an $18 stock and the put is $17 strike price then it is $1 "out of the money" the more you pay.
so for the following stock price

$18
a $17 put option for August may be $2
Sept May be $3
Oct May be $4

This really depends on the volitivity index, or VIX. It is a tradable stock (sort of) and it goes up when stocks are more volitile (thats what they say but it's really when the markets overall go down, not up)

When the vix is high (say 40) then the $18 stock, $17 option may look like:

August: $3.50
Sept: $5.00
Oct: $6.00

And a $16 option (which is farther out of the money may be:

August: $2.00
Sep: $3.00
Oct: $4.00

When low (say vix at 20) it would look like:

$17
August: $2.00
Sep: $2.50
Oct: $3.00

So if you want to go long Leaps (long term options, say 3+ months away) you want to buy them on a day when the markets are skyrocketing and the vix is lower. that has the effect of giving your position some safety buffer in case of the underlying stock price going against you.

Will answer more shortly

 

[daddymonsterpoodle]

I would invest in property around campuses. Just about guaranteed income.. Also your initial outlay would be less. Retirement units might be another area to look into. Small, one bedroom units with a small/tiny garden. There are old people who are still capable but want to downsize and dont want to go into a home.
There are no savings accounts that would give you the same return.

 

[Colossus]

This is all super over my head, but interesting nonetheless.

With 100k in annual free cashflow, i would, at this point:

-allocate 10% to liquid, emergency savings.
-keep my job
-put about half in the Vanguard S&P 500 Index
-use the rest to pay off all debts; student loans, mortage, auto.

Trading never interested me; too volatile and unreliable. Real estate has big potential but also considerable risk--no one can accurately predict appreciation beyond about 3-4 years max, IMO.

Aside from celebrities, athletes, etc, the wealthiest people i have known got wealthy through compounding business transactions and real estate sales. And that takes time.

The only thing im interested in is having enough money to never be someone's employee again. You cant buy happiness, but you can buy freedom.

 

[BeTheChange]

BB, show me your five-year track record, and I'm in as well. Even better, I'll draw up hedge fund docs (75k in legal work) fully comp'ed, and raise mid eight-figures at a 80/20 profit-split with investors.

BeTheChange, I'm going to share my real-estate stratagem in this thread soon.

Hey guru. If you have a chance I'd be very interested to hear more about your real estate strategy.

I'm looking to close my first investment property deal within 3 - 6 months, and then my next one shortly after. Then, the aim is to use my current job (very stable, everyone needs finance) and side business as a cash cow to fund growth in the property portfolio. I'm aiming to start small and build from there with the ambition to acquire an average of 2 properties a year for the next 5 years and then ramp up from there.

My family will likely be managing the properties on my behalf so I can focus on taking care of business.

 

[BeExcellent]

@BeTheChange I would caution you about having family manage your rental portfolio.

That can be a recipe for ruined family relationships unless things are very well defined & understood by all parties.

You are better off managing yourself if the properties are local to you at least at first. Doing your own management will teach you things about the business and about what certain items ought to cost that will save you thousands of dollars by not getting ripped off in the future when you no longer handle day to day affairs.

PM me if you want additional thoughts. I've been meaning to start a real estate investment thread as well (and I too have an interest in what @guru1000 does in his locale) but I am buried with client work so haven't yet found the time.

It can be a great long term wealth play if done well. I will attest to that.