Quinn’s Brain, aka QBrain

I have been thinking about how to insure a portfolio and have been attacking the problem with options.

My thought process was that I wanted to risk no more than 10% loss from the price in January, and in January I would buy PUT options with a strike price 10% the current price, with an expiration one year away. This would insure that my portfolio would be worth no less than 90% what it was worth in January.

Good idea, and I am sure we all would have liked to do that last January.

The problem is that the cost to do this would be about 10%/year. No one can afford to give up 10% a year and still come out ahead over time. Even selling covered calls to offset the cost of the insurance, it seems like a lot of risk.

What I noticed, but have not fully researched, is that in the money calls might be cheaper long term, but more expensive short term. In the money options always cost more than out of money options, because they have intrinsic value. If they were executed immediately, the executor would be on the favorable side of the transaction. An in the money call option has a underlying stock price worth more than the strike price, so executing immediately would allow you to follow up with a sale for a positive return. It makes sense that an in the money option costs more than an out of money option.

So how does in the money options work for insurance? You would buy a PUT option with a strike price higher than the current trading price of a stock. For example, SPY is about $83 right now, and a PUT with a strike price of 100 is $17 in the money. If I bought a PUT with a strike price of $100, I could execute it immediately, and someone would pay me $100 for my $83 SPY. Now the PUT will cost more than $17, and the difference between the $17 and the real price of the option is the time value of the option. For a option that expires in a year, that time value should be quite a bit.

The question is, if I buy in the money PUTs, will the time value be cheap enough that I can afford to insure my portfolio?

February 8th, 2009 | Category: Finance | Leave a comment

When I got up this morning, I didn’t think it was going to happen. I didn’t sleep well last night, which has become a little too common, slept in this morning and when I did finally get up my back was sore, so I planned on skipping practice.

Around 10am, when I finally decided it was time to take a shower, I turned on the water and said, “I feel fine now, maybe I will swim later.” Realized how stupid that was, turned the water off and headed directly to the gym.

I am focusing on going fast on the weekend, and not really worrying about yardage. Saturday, I hopped in and did a 200m warm up (very short warm up for me) and then immediately did a 200m free for time. This will be very similar to a meet, where I will have a shorter than usual warm up and than an all out sprint. I actually swam faster from a push (not off the blocks), than I did in the November meet. The bad news is, I am still 20+ seconds off my goal time and 10 seconds off what I need to be able to go from a push to realistically hit my goal time (1:49.99 yards).

Today, instead of doing a fast 200, I did 8×50 all out on a minute. My goal currently on this set is to swim 50s on a 30 and this morning is was swimming 32-33. Not where I need to be yet.

I am happy that I finally got to swim 5 days out of 7, and hopefully I can maintain that. I am moving in the right direction toward my goal, and it will be obvious in a couple weeks if I am progressing fast enough to achieve it by the end of March.

I might go to a meet at the end of the month by myself so I can get a real race in before Zones. Entries are due on the 25th, so I will probably wait until the last minute to enter. Don’t really like the pool hosting the meet

February 8th, 2009 | Category: Swimming | Leave a comment

I am feeling much better, probably at 90% right now.

This was my yoga-swim workout at Lifetime.

• 600m free warm up
• 4×100m back on 2:00 working on long stroke with solid kick
• 10×50m flutter kick on 1:30 odds down on left side back on right side, evens on back
• 2×50m dolphin kick on 1:30
• 4×100m back on 2:00 same as above
• 12×50m IM on 1:00 1st 50 fly drill, 2nd 50 back, 3rd 50 breast, 4 times through
• 8×50m free on 1:00 odds catchup drill, focus on early vertical forearm, both with strong kick
• 1×200m for time 2:35
• 300m cool down 200 back, 100 free

A 2:35 in meters converts to a 2:18 high in yards. I would like to get the 2:35 down to a 2:10 from a push. For comparison, my 200m free from the November meet was a 2:26.44, but a 2:10 is where I need to be to break 1:50 in yards, if not a little faster.

Back to normal practice and weights tomorrow. Hopefully I did not lose too much aerobic ground this week.

February 1st, 2009 | Category: Swimming | Leave a comment

No swimming, no lifting, no breathing through my nose for the last 5 days. Sucks, but I think it is almost over. I think I will do what the USMS forum calls a yoga practice tomorrow. It is a swim practice that is slow and easy focusing on loosening up more than anything.

January 31st, 2009 | Category: Swimming | Leave a comment

Woke up last night at 2:30am with a horrible headache, drank a glass of water, took a tylenol and went back to sleep. Woke up at 3:55am with a horrible headache, drank a glass of water and went back to sleep. Woke up at 6:00am drank a glass of water and went back to sleep. Woke up at 7:30am, felt so bad I didn’t even want to move. I still had a headache, my mouth was dry and I was burning up.

Dehydration sucks. Pretty much I was a goddamned retard yesterday, and paid for it today. Usually at work I drink about 10oz of water every hour, and more if practice was hard. Yesterday, I must have worked out harder than I thought, but I probably only drank 3 16 oz glasses of water and a bunch of wine.

There is a big difference between the 48 oz of water I drank, and the 90+ oz I should have drank. Obviously hydrating with wine is not helpful, but I think the key problem is that I don’t have the habits in place around the house that I need.

Even now, writing this post, I am sitting here thirsty. Thirst is a delayed response, so I needed to be drinking water hours ago.

Because of the dehydration this morning, I skipped my Sunday practice. I will have to do a better job in the future of maintaining my hydration.

I am off to down a glass of water right now.

January 25th, 2009 | Category: Swimming | Leave a comment

I joined Lifetime again last night. It only cost $15 to be added back onto my wife’s plan, which is not what I thought it cost last time. Next month, it will be an additional $50/month for me.

This morning we left at normal time, 4:40am, to head out for a swim at Lifetime. Lifetime is a 24×7 gym, but they don’t have anyone working the front desk in the middle of the night, so you have to ring the door bell. One of the staff who is prepping the building for normal hours comes out and opens the door. This took about 3 minutes, which was fine because we were all bundled up against the cold and the front vestibule was protecting us from the worst of the cold anyway, but I wasn’t sure whoever it was that was supposed to unlock the door actually heard the bell. It was my first time this early, so I waited patiently.

I need not have worried about the bell. About 30 minutes later, while swimming I hear the front bell ring. It is not so much that it is really loud, but it must chime from every speaker in the entire building.

Swimming that early on the weekend was cool it was not until I was getting out at 6:10 that someone else was finally getting in. I like having the pool to myself but I am sure during the week it picks up earlier.

I got in 3800 meters, or a little less than 2.5 miles.

This morning I did 400 free, 300 back, 200 free, 100 back as a warmup. Originally I thought I would 200s, starting at 3:00 and dropping 5 seconds until I couldn’t make one. But I wanted to do at least 5 200s, so I did 5×200 on 3:00. This ended up being more aerobic than I wanted, but oh well. Following that with 5×100 back on 1:50 to loosen up for my sprint set. The sprint set was 10×50s on a 1:00 holding 35, which ended up being too easy. It got me breathing hard, but I should have tried holding 32s. The rest of the workout was supposed to be aerobic pace, and was 12×25 kick on side, down right, back left and a 300 cool down.

The goals for Saturdays are to do some hard 200s, and some short sprints with Sundays being purely aerobic longer distance stuff. Both days will have kick components and shoot for more than 4k meters.

January 24th, 2009 | Category: Swimming | Leave a comment

I will be placing my first options trade Monday. Well, not my first, but my first with my new options only account where I will be regularly trading options.

I started out wanting to do naked puts, where you get paid to buy a stock if the stock price drops below a certain point. Originally, I wanted to sell Google puts at $250, which would make about $5/month, and if it gets executed, you would end up with Google at $250. Google at $250 is a P/E of about 15, which I would be happy with, no matter what crazy nose dive the market took for Google to hit that price, since I wouldn’t be selling Google any time soon, and I would be paid to wait for it to hit my target price. The problem is, I need $25k sitting around so that I can buy the stock when the target gets hit.

So then I started thinking about put spreads. You sell one put, saying you will buy a stock if it drops too much and collect a fee, and buy one put, saying someone will buy your stock if it drops even more. The first put is more expensive then the second put, thus you are credited the difference between the two put prices. The second put provides you with insurance, so the most you are at risk is the difference between the two put strike prices. This is called a bull put spread, and it is a strategy you use when you think the market is going to be flat or go up in the next 30 days.

But I don’t really know what the market is going to do.

If you don’t have an opinion on the market, maybe a market neutral strategy is a good idea. I am reasonably confident that the S&P 500 will stay below 950 for the next month, and above 800.

Since I hold that believe, then an iron condor makes sense, which is a highly profitable strategy when the market is flat. The market isn’t currently flat, and that is why my high guess and low guess are so far apart.

So what is an iron condor. An iron condor is a call spread for a credit paired with a put spread for a credit, both side providing a credit. The benefit of the pairing is that only one side can be a loss. The downside is, the loss on that one side is usually enough to make the entire iron condor a loser for the month. The goal is to pick high and a low that the market will not reach, but still generate enough credit so the trade is worth doing.

This is where risk management comes into play. Iron condors lower your financial exposure, but if the market rockets in either direction, iron condors are losers.

January 24th, 2009 | Category: Finance | Leave a comment

My fastest 200 free time is a 1:50.0x when I was a Jr. in high school. I have decided to try and beat my best time, now that I am old and fat.

After discussing this goal online in a Masters swimming forum, I need to make a few changes to accomplish my goal. I need to swim a couple more times a week, and my focus needs to be training to actually achieve my goal. It will be really interesting (to me at least), if I can go faster than I did in high school.

That is it. Just stating it publicly, so I can be humiliated if I die before accomplishing it. If it is going to happen this year, it will have at the end of March, which is the end of the short course yards season. I think it is more likely that it will happen next year, but the closer I can come in March, the easier it will be to achieve next year.

January 18th, 2009 | Category: General | Leave a comment

A thought crossed my mind, “How great would it have been to short Ford a go long on Toyota.” By betting Ford is going to go down, and Toyota is going to go up, what I am really doing is saying Ford is that Toyota is going to outperform Ford.

Lets say I thought of this last January, and I bought an equal dollar value of long Toyota and short Ford.

• January 2, 2008, sell 1,515 shares of F (Ford) at $6.60/share and buy 93 shares of TM (Toyota) at $106.46/share.
• December 30, 2008, sell 93 shares of TM at $65.44/share and buy 1515 shares of F at $2.29/share.

Uh oh, those numbers don’t look good. Both Toyota and Ford devalued.

I bought about $10,000 of Toyota stock and sold $10,000 worth of Ford stock, which I borrowed from my broker and have to return at some point. When I sold my Toyota, I made $6,085.92 (Ouch!). I bought 1515 shares of Ford for $3469.35.

So how much money did I lose on my virtual trade?

I made $2,714.79, or 27% return on the $10,000. The return on investment is not really correct, because this strategy actually carries unlimited risk since Ford could have gone up infinitely, while Toyota stayed the same or went down. The odds of that happening seem acceptable to me.

Now, after I thought of these little scenario, I also realized that I picked Ford, which is the healthiest of all the American car companies. I should I picked GM, since it is on the verge of bankruptcy and Chrysler is privately held.

If I would have picked a worse American car company, how would I have faired?

If I would have picked the GM over Ford, I would have made 48.6% return on my $10k.

This makes a lot of assumptions. One, that there are no costs associated with a short sale (there are and they are about 10% APR for me). Two, that I could have picked this scenario last year, but all i picked was that Toyota would out perform Ford, not exactly genius.

What wasn’t an assumption but is necessary for these kind of returns is a catastrophic event for the short company in a bear market or a outstanding return for the long company in a bull market. Without the best company significantly out performing the worst company, the cost of the short sale will likely create a losing trade in real life.

What I don’t know is if I could structure the same approach with options, providing a fixed risk and eliminate the costs associated with the short sale. I am pretty sure I can, and I imagine that the sector spread is not uncommon or original.

January 1st, 2009 | Category: Finance | Leave a comment