current trades

[Arch0wl]

I think the emerging foreign currency analogy is a lot closer to the pink sheet analogy. there are a huge number of pink sheets, iirc 15,000 more, but only something like 160-180 circulating currencies, and about half that many alt-cryptos have any sort of market cap whatsoever, so you have a limited number to even look at.

it'd either be an extreme profit or extreme loss scenario; there's not much in between. alt-cryptos either become viable (in which case they rise from something like $0.0001 to $2 per coin) or they completely bust. also, unlike currencies, coins more or less succeed based on marketing tactics and functionality, which you can to some degree evaluate if you're good at that sort of thing.

but yes, I am completely aware that if your goal is reliable or even steady profit, this is a horrendous strategy.

also, 'ttly' has to be the most confusing abbreviation I've read in a long time.

[Litodude]

the only 1.0 positively correlated effect that multiple cryptocurrencies provide to the underlying(s) is liquidity to themselves. this relates to the fx currency analogy. we've even lived through the collapse of mutilple gov't-backed currencies into a centralized standard before: the euro. how many people do you think gained money by over-diversifying* ?

secondly, the analogy of pink sheet/OTC/penny stocks was to point out the most widely used scam in any market that doesn't have enough volume: the pump and dump^. the strategy is self-explanatory, but it still happens - even to this day. you think you know some news, or insider tid-bit, or you might fundamentally analyze (ROFL) that article A from omgbtc.com and article B from dogecoinamazinprofits.com and so on, have given you a market tip - an edge to something someone else doesn't know. ***** you just guessing a directional play (which is hopefully up). and once it pumps...it dumps. and it's a massive, stinky log.


*yes there is such a thing as over-diversifying and being unable to keep track of your portfolio especially when beta-weighted against specific equities like production, food, metals, oil, etc. u have no idea how shit's gonna move because you don't know how each of your positions are correlated

^ search up SYNACOR or NQ MOBILE if u think i'm just fuccen crazy

[Litodude]

i prolly shouldn't compare apples to oranges but yo, finance theory is universal. you cannot defeat an ineffcient market (unless you create/created the market itself (e.g. brokers)) and you cannot expect to earn immediate significant profit without immediate significant risk. that is just plain statistics. i think cryptocurrencies are cool and they have the potential for creating an amazing market...if this, if that, and if a whole lot of shit happens to make it so. it's too early, and it's not early enough for you to make a reliable profit. it's purely speculation and it's BORING speculation

nuff that nasty shit let's talk about my CSCO earnings plae

[Litodude]

Originally Posted by Litodude

https://www.google.com/finance?cid=99624

suck me baby

closed at 29.17 gee gee

oops meant to send this like an hour ago but yea sold right at open

[Arch0wl]

I agree with you on virtually everything you said actually, especially the bit about finance theory being universal. Liquidity among other cryptos isn't a big deal though if they're able to be exchanged for bitcoins, since it's insanely easy to cash out bitcoins now.

What I'm curious about is how something like this differs from, say, investing in a tech startup, in terms of the end-goal. I've known (not personally, but am a degree of separation from) investors who will throw money at various startups and this actually works for them, because the profit from when even one startup succeeds is so enormous that it eclipses all of their other losses. Obviously some people are better at predicting the success of tech startups than others due to factors that are not financial, either partially or largely. I don't think you could have predicted the success of instagram if you didn't have a good social sense, for example.

But you mentioned "reliable profit" several times so I take it this is pretty far from what you're trying to get out of investing.

I frankly don't have any attachment to cryptocurrencies. They're useful for buying drugs and avoiding creditors, lol. Beyond that, I couldn't care less if they ceased to exist. My interest comes from knowing that the demographic who gets into things like alternative cryptocurrencies is the same demographic who gets into obscure linux distributions and if you can predict what one demographic is going to flock to on a mass scale, well, you already know where I'm going with this.

[Litodude]

being able to cash out easily doesn't mean the bid/ask spread is very tight lol

venture capitalism is a completely different topic all-together and becomes more so a legal battle for equity control than anything else. gotta remember those companies are private, or publicly owned but privately managed (eg berkshire, closed-end funds, etc).

[Litodude]

Originally Posted by Litodude

it's funny how you mention that because there's actually a rule used by most brokerages that you have to have a minimum balance of 25k in your account in order to use some of the more capital generating trading strategies like naked puts and futures

if you're trading naked futures then it's like 125k lmao

Congratulations - we have approved your account for options trading

You can now write uncovered options and more

8)

[Reincarnate]

I'm more of a lazy type. Invest in diversified shit, let it grow.

[Litodude]

https://www.youtube.com/watch?v=jGhULhxPKpA i do this on my roth rubix, it's the same shit as i mentioned preivously

[Litodude]

https://www.youtube.com/watch?v=-g8TXgZdnf4 here's a 15yr study for it

[Reincarnate]

Originally Posted by Arch0wl

I agree with this for the most part, but if you have a shit ton of disposable to burn (like, 300k) you could literally blindly invest $1000 in every alt-crypto and if even one is widely adopted you've made ... well, assuming you could trade it for bitcoins and cash out, a fuckton. every other investment would be a complete blowout, though. it's not unlike playing the lottery on a much smaller scale.

actually, it'd be like penny stock investing but to a much more exaggerated degree, since some cryptocurrencies start out at something like $0.0001 per coin.

with that said, this is an extremely dumb idea if you don't have a lot of money to blow.

I mean, I'm in no position to invest right now, so obviously I haven't done this, it's just been something I thought about ever since I saw the rise of litecoin.

This is the ultimate example: http://en.wikipedia.org/wiki/St._Petersburg_paradox

Both you and Litodude have pretty much explained this, but I just felt the need to throw some math in here.

In this game, you begin with a pot of $2. You flip a coin. If it lands tails, the game ends and you take the pot. If it lands heads, the pot doubles and you continue / repeat the process again. What's the expected value of this game? (1/2)*2 + (1/4)*4 + (1/8)*8 + ... and so on. This reduces to 1 + 1 + 1 + 1 + ..., which implies an infinite expected value.

In other words, you should be willing to pay *anything* to play this game. And yet, in practice, you would go bankrupt playing this if it required a nontrivial participation / transaction cost relative to your wealth. Why? Because hitting the huge payouts takes a long, long time. In the meantime, you would burn through a ton of money.

If you have "infinite" (or crazy insane huge) wealth, this game is fine because you can continue to play and eventually win all your money back and then some. But of course, this calls into question practical concerns, like why you'd be gambling in the first place if you had that much wealth, or why you'd be participating in such an inefficient game.

Here's a Python program I slapped together to illustrate. You can play around with the cost and initial wealth parameters:

from random import randint

costPerGame = 20
wealth = 1000

#------------------------------------

trial = 0 #to track how many games we play

print "starting wealth =", wealth

while 1: #play as long as we can
    
    pot = 2 #initial pot
    numHeads = 0 #to track how many heads we've flipped in this single game
    
    while 1: #play the game
        coin = randint(1,2) #flip the coin
        if coin == 1: #heads
            numHeads += 1
            pot *= 2 #double the pot
        elif coin == 2: #tails
            break #we cash out, break the while loop
        
    wealth += (pot-costPerGame) #profit = revenue - cost
    trial += 1
    
    print "trial =", trial, ", numHeads =", numHeads, ", cost =", costPerGame, ", payout =", pot, ", wealth =", wealth
    if wealth < costPerGame:
        print "You can no longer play!" 
        break

In real life, of course, this sort of thing operates on much smaller scales, but the underlying point is similar. If you have a lot of starting wealth relative to your costs, you can afford to screw up a lot because through sheer brute force alone, you'll hit a winner eventually.

[Reincarnate]

Originally Posted by Litodude

https://www.youtube.com/watch?v=-g8TXgZdnf4 here's a 15yr study for it

Eh I have several issues with this video but honestly don't have the patience for a debate, lol. I think buying and holding / rebalancing / asset class diversification is more than good enough for most people when it comes to personal finance (ignoring of course all the other relevant shit about emergency funds and debt blah blah blah).

[Litodude]

Originally Posted by Reincarnate

This is the ultimate example: http://en.wikipedia.org/wiki/St._Petersburg_paradox

Both you and Litodude have pretty much explained this, but I just felt the need to throw some math in here.

In this game, you begin with a pot of $2. You flip a coin. If it lands tails, the game ends and you take the pot. If it lands heads, the pot doubles and you continue / repeat the process again. What's the expected value of this game? (1/2)*2 + (1/4)*4 + (1/8)*8 + ... and so on. This reduces to 1 + 1 + 1 + 1 + ..., which implies an infinite expected value.

this would make sense if the price of stocks moved 1:1 based on the multitude of calculations of the assets' underlying value but there's differentiation between the two (measured by P/E, or share price divided by earnings per share (EPS)) that doesn't match. and it varies between industries like tech, where the norm might be 100x forward P/E or cyclical industries where the P/E is about 4-7x.

there's also transaction fees or commission fees (normal in the casino as well) but more evident in the market since the commission or 'ante' is taken at the beginning of the trade.

so your $2 initial purchase of X starts off at like 1.98 and the asset that's worth $2 really isn't $2 it's more like .35x but the price to own that stock is increased because more people want it and yadda yadda.

[Litodude]

in derivatives trading it's also even diffrent : the 50/50 chance for a +1/-1 doesn't take place either becaue stocks don't move completely brownian, it's brownian motion w/ stochastic drift (or geometric brownian motion)

[Reincarnate]

Originally Posted by Litodude

this would make sense if the price of stocks moved 1:1 based on the multitude of calculations of the assets' underlying value but there's differentiation between the two (measured by P/E, or share price divided by earnings per share (EPS)) that doesn't match. and it varies between industries like tech, where the norm might be 100x forward P/E or cyclical industries where the P/E is about 4-7x.

there's also transaction fees or commission fees (normal in the casino as well) but more evident in the market since the commission or 'ante' is taken at the beginning of the trade.

so your $2 initial purchase of X starts off at like 1.98 and the asset that's worth $2 really isn't $2 it's more like .35x but the price to own that stock is increased because more people want it and yadda yadda.

Sure -- in the case of the St. Petersburg paradox, the cost / probability distribution is fixed and known and not open to any other exogenous factors that we'd consider in the real world. A lot of things can change depending on how we reframe the paradox and what assumptions we make, and they'd result in totally different outcomes with respect to things like P/E or EPS if we wanted to somehow cram it into a real-world framework (which would be awkward in the first place and I'm not even sure how well it'd translate without sacrificing key points).

The point I was attempting to make with the analogy was to show how things can depend a great deal on things like wealth and cost.

I can only speak for myself (maybe you know a lot more than I do about this) -- but in my experience, people who spend a great deal of time messing around with complex stocks / options / etc during their off-time? If they don't know what they're doing, then obviously they're going to lose in the long run and they would have been better off playing it safe. But if they do know what they're doing? Then I think they are wasting their time.

I think in that case, you're much better off moving to a big city and working for a trading firm / board where you can trade with a lot more capital / size / sophisticated technology / talented colleagues, and earn a lot more through income than you would with personal accounts. Unless you're a multi-millionaire already, in which case (as per my earlier analogy) it doesn't really matter what you do because you're almost certain to earn a lot of money unless you do something stupid somewhere.

[Litodude]

ohhh got the paradox now. i totally agree with everything. i mean, this isn't my primary job, this is my hobby and i enjoy it immensely. i'm sure i could earn much more by facilitating trades and account mergers and all that noise, but even tihnking about doing that i'm turned off: that's way too much bureaucracy and brown-noising for my taste.

i'm simply showin ya how an extra 15 minute a month could hugely benefit the individual investor. there's just some really complex fundamental things to understand first (like the greeks), but the investment in that knowledge pays off immensely in the long run shrug

[Reincarnate]

Yeah, if it's fun and you're not hurting your bottom line, then by all means, go for it. Doing it as your day job, though, may not be as bad as you think (especially if you don't plan on doing it forever). Trading can be a lot of fun with the right group.

[Litodude]

if i go back to college full-time i'll definitely look toward opening an investment club for sure.

there's my actual capital increase without the necessity for leverage :P

[Reach]

Ok, educate me.

I'm not a finance expert, but I'm going to be learning a lot more once my loans are paid off and I'm making serious $$ (hopefully soon). Loans are cramping my income right now but once they're paid off I should be making tons of money.

I'm under the assumption that there is NO POSSIBLE WAY to beat the market average over the long term. If there was, everyone would be rich, hmm?

This makes complete sense to me statistically speaking. You can get lucky with particular investments but, it's just that. Over the long haul wouldn't it not matter though?

So I was under the assumption that safe, diversified investments to meet the market average was best. And the more money you have, the more money you can make. Rich get richer type stuff.

[Litodude]

absolutely not true.

tl;dr: more work = more profit. put in work. more risk = more profit. don't be a bitch.

i'm going to speak specifically only on stocks first, then derivatives.

the efficient market hypothesis is widely accepted to be true: statistically, there is no possible way an individual investor who hand-selects their portfolio/individual stocks to adequately gain a return that consistently beats the market average, or a broad-based market index. 'Random-walkers' take it one step further and state that a [pseudo]random selection of blue-chip stocks would be equal to, if not beat the market over the long term. literally blindfold someone and shoot darts at current top choices (ex. AAPL, GOOG, BKB).

well here's this really good book that i recommend reading: http://www.amazon.com/Common-Stocks-...dp/0471445509/ One of my favorite investment books to have read, beating Malkiel's 'A Random Walk Down Wall Street' and Gharham's 'The Intelligent Investor'. All of these books are good too.

Anyway to summarize: There's way to beat the average which take a lot of time and effort in doing so. I think you have to have a very good understanding of current socioeconomic policies, and a little bit of math, in order to be a good equity investor. It's possible and it can be done. I've actually got a perfect example of this since my own portfolio has a perfect side-by-side comparisons of a 'passive' strategy vs an 'active' strategy (i quote 'active' because to me, now, trading derivatives, it is BARELY active):

passive, passive, active

10,18,44% return respectively based on activity. 2013 was the same (beat the market by 2%, hard as fuck since the S&P gained 32% that year, and 2012 i started in july so i had nothing to report then but my initial loss of 10%).

I really recommend reading dem books thou


now, what this basically equates to is more risk = more possible return/loss. so this is where derivatives come into play.

there's two types of stock option derivatives (sticking to this for now to keep it simple, keeping futures and swaps out of this) which are directional or non-directional plays. with stocks, really, everyone is directional one way: up. you hope the underlying you bought goes UP from where you originally bought it. that's simple.

a directional option play means basically you're hoping the stock goes in the direction you want it to go, based on the type of option you bought. whether it's a long call, long put, short call, or short put. what it basically means is that you want the underlying to go the way you want (a direction), otherwise your option contract becomes worthless. AND IF YOU'RE NOT CAREFUL, there's this thing called theta or 'time decay' which might make your option contract worth even less over time.

now, non-directional plays pretty much mean you could care less which way the underlying moves, as long as it does what you want it to do, whether that's moving A LOT, or not moving at all. delta measures the price of the option contract as the underlying moves +/- 1 point. directional plays are delta-heavy. non-directional plays are delta-neutral.

so, i mean, it's not a very difficult concept to grasp right? ok good. now let's move on to vega.

vega is the $ amount value of an underlying assets volatility, or sensitivity to change. meaning if you had a position that benefits from positive vega, or a position that benefits from volatility, then the value of your option contract goes up. if you have a position that benefits from a decrease in volatility, then you're considered positive theta. bear with me on this.

an underlying asset that has high volatility usually means it's unstable or uncertain, or can possible swing many standard deviations away from its (the underlying's mean). remember how i mention we use black-scholes to calculate the value of an option? well you can also make constants and derive a 'rank' in which you can measure an underlying's current volatility with it's historical volatility and come up with a conclusion of its implied (or future) volatility. more investors need to trade implied volatility. why?









well honestly there's a lot of complicated math in this, more than the math that's already taken place from the things i mentioned above, but to [again] put it tersely: implied volatility is always overpriced - always. funds will always hedge there positions away from risk (i.e volality). there isn't a possibility to have a position that benefits from a decrease in implied volatility because there are already too many people doing so. what we can do then is benefit from non-directional positions that are overpriced via theta.

theta is defined as the price of the option contract as time moves. option contracts are set at a future date. as the date gets closer and closer, you option contract loses value exponentially (if you have negative theta). delta positive positions are always negative theta.



time-decay, and accelerate theta decay is constant. we like constants. constants mean guaranteed profit. so in order to capture the benefits from theta decay, you need a an option contract that is either delta-negative (puts) or delta-neutral (straddles, strangles, Iron Condors).

so first you must start with a position that is overpriced (high volatility) and make a position that captures the positive theta. you can do this with risk defined trades like iron condors, or undefined risk trades like short straddles or short strangles. 'undefined' risk trades mean that, if the trade goes against you and the underlying actually moves past your legs, your contract can get called away and you might owe..big time. im' talking you were hoping to make a credit profit of $200 and now you owe $3500.

so why would i even recommend this strategy? well, another constant is probability. there are ways to offset your risk by increasing the legs of your short trades to areas of probability that won't touch....but at a cost of your contract premium. so you have to balance between making a larger profit and losing most of the time, or a smaller profit but more winners. ex: a 70% chance of make $30 over multiple instances are statistically more beneficial that trades that have a 30% chance of making $70 over the same amount of instances. and thanks to options being leveraging machines, you save your precious precious capital and can (statistically) always cover your losses. which are like 1/20 trades if you're doing it right.