abeles@mhuxi.UUCP (08/03/83)
I have recently been approached by someone who got my name from an alumni list (we are both alumni of MIT) and who is a technical analyst. He suggests investment in options on the CBOE 100 index, and claims that the market is due for a decline. Thus he suggests the purchase of puts. My feeling about this is that the conventional wisdom today seems to be that the market is in for a "correction" (alias, decline). Anything that is conventional wisdom I feel must already be accounted for in the markets. Another aspect of this is the "Random Walk". For those who haven't read "A Random Walk Down Wall Street", by Burton Malkiel, the idea is that it has already been shown that no investors or investment advisors or institutional investors have been able to do any better than a randomly selected portfolio over the long term. That is, ther are no "experts". Malkiel includes technical analysts in his study and finds that they are likewise not experts. Thus, I am wary of this type of investment, regardless of the risk. Incidentally, while risk-aversion is the usually preferred investment posture, it is not obvious to me that preference for risk (gambling) is not entirely inappropriate in the short run. Any comments?
cpj@uofm-cv.UUCP (08/04/83)
There are a number of reasons for the present decline and a number of indicators that seem to work slightly. There are 2 forms of the Modern Portfolio Theory. The weak form is that technical analysis can't predict trends in the market on a short-term basis of 1-13 weeks. These are the periods of time I think this has been tested on. The stronger form is called the efficient market hypothesis that states that fundamental analysis does'nt work on a risk (beta) adjusted basis. The reason it doesn't work is that while earning estimates have predictive value if correct, earnings also are a random walk. However some indicators such as those used by Zweig are of some value in doing better on the market maybe. Treasury bill and related interest info such as free reserves seem to have some predictive value. The current rise in interest rates which has started in June or July may indicate further declines. However much of the effect of this all may have been disipated in July.
patc@shark.UUCP (Pat Conley) (08/08/83)
CBOE options are out and out gambling I think your analyst friend is just out to churn potential accounts. As far as buying puts on any of the indicators i.e. SP100 or CBOE 100 and any other such thing especially with puts the first thing to remember is the risk/reward relationship which is ( 100% risk to lose all money / fixed gain if market collapses ). Since the market is unlikely to collapse and you are very likely to lose your money this is a very pad investment. Now for those super speculators heed this message if you want to make a little money in puts you should have bought last week... this is because options have two values of concern intrinsic time value and speculative (greed) premium. The speculative premium on everything shot out of sight last week when the high interest rates were first announced which in turn shot up the speculative premium i.e. if you bought puts now you would be paying to much. ( Only buy puts when there cheap!!!!!!!) The intrinsic value appears when the CBOE100 or whatever actually starts decaying, but heed this; this is where the suckers get in. For more information on the option valuation see the Black and Shoals model work ( one few true post academic usages of integral calculus ) this is useful for determining if your getting into options to late. Since the current correction will soon go back as the current bullish predictions are out for clear to december getting in to calls on some very volatile stocks might be a good bet now that there cheap. For calls the risk /reward is ( 100% risk / unlimited gain ) i.e. theres no limit how high a stock can go up. As for the broker who says to buy CBOE100 options the commisions are very nice ( a guy could get rich in that business, perhaps much more than any investor might) buy your friend a copy of the famous book "where are the customers yachts",1942 an excellent book on the way brokers work. I play options the tools I like best are options charts by Daily graphs and on line NYSE quotation and order entry by C.d anderson/Trade master. For people interested in options they should read Clasings book "DJ options guide" and when you get really sharp pick up Macmillans "Options as a strategic investment". These are both somewhat technical books especially the latter.