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Mark Johnson wrote:
>
> Has anyone else read this book? I got my copy from Windsor
> Books, for about $55. I would like to exchange opinions
> with other purchasers/readers by email.
>
> The book advocates two strategies using stock index
> options, either the OEX (CBOT) or the SIS (LIFFE).
>
> One of the options strategies is intermediate-term
> (approx 30 day trade duration) and the other is short-term
> (approx 2 hour trade duration).
>
> His intermediate-term strategy boils down to this: index
> options are chronically overpriced, particularly far-out-of-
> the-money options. So you should sell options and collect
> the inflated premiums and you'll do great. Schiller
> establishes option spreads (e.g. sell a call, buy a call
> further out) for a net credit ("credit spreads" in Ken
> Trester books).
>
> Schiller abandons the standard options pricing models
> (Black-Scholes, Cox-Rubenstein-Ross, et al), and instead
> presents his very own formulae for options probabilities.
> Using his own equations, Schiller finds that if you sell
> credit spreads with about 4 weeks till expiration, far enough
> out-of-the-money that the net credit is one, then that spread
> will typically have about a 95 percent chance of expiring
> worthless, and you will get to keep the entire premium (1).
> An example:
>
> It is 9:20AM PDT on Thursday June 18, 1998.
> The cash OEX index is presently 536.40
>
> July 98 calls @ strike=560 are trading at 3
> July 98 calls @ strike=565 are trading at 1 7/8
>
> Schiller would have you sell the July 560 calls and
> buy the July 565 calls. The net premium is 1 1/8
> credit, which goes into your account. This spread
> expires on July 17th. If the OEX is at or below 560
> on that date, you get to keep the entire 1 1/8
> premium received.
>
> Schiller's probability model says that there is
> a 95% probability that the OEX will be at or below
> 560 on July 17th, so there's a 95% probability that
> you get to keep the entire 1 1/8 credit.
>
> Just to horse around with arithmetic, let's do a VERY CRUDE
> calculation of expectation on this position.
>
> 95% of the time, you win 1 1/8
> 5% of the time, you lose 3 7/8 (since the spread is 5 wide)
>
> So your expected profit is: (0.95 * 1.125) + (0.05 * -3.875)
> which is +0.875 ... 7/8ths. Neglecting commissions etc.
>
> Your risk on this trade is 3 7/8 ($387.50) per contract.
> Your expected profit is 7/8 ($87.50) per contract.
>
> If you trade one contract for every $775 in your account,
> as Schiller suggests, (he says don't put up more than 50%
> of your capital for margin on any one trade), then on the
> average you will make $87.50 profit for every $775 in the
> account. That's a profit of 11.29 percent, in one month.
>
> And you get to make this trade twelve times a year (once per
> expiration month). So your expected annual growth rate is
> 261% per year.
>
> Schiller deducts commissions (he assumes $7.50 per contract)
> and he estimates the impact of the bid-ask spread, and he
> assumes you'll get a net credit of 1 rather than 1 1/8 as
> shown in this example. That's how he arrives at a figure of
> "only" 100% per year.
>
> That's his intermediate-term strategy. His short-term
> strategy, and his profitibility estimates for it,
> are REALLY surprising.
>
> So, has anyone else read the book? Wanna exchange
> opinions? email me please.
>
> -Mark Johnson
> janitor@xxxxxxxxxxxx
This is exactly what a friend of mine is doing and he averages about
$18000 per month. He very conservative, so with a little bit more
aggression he could really score.
Lamont Cranston
"who knows what evil lurks"
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