There are many myths about derivative strategies

There are many  myths about derivative  strategies. Most of the popular derivative strategies have less than 50% probability of making profit. Their risks/ return characteristics are often less than one. Many of them result in unlimited losses under exceptional circumstances. In the modern world appearance of Black swans is frequently observed. This is due to the globalisation of the world financial markets. In an individual’s life exceptional circumstances appear in every body’s life once or twice. More often these exceptional will ruin the person permanently.Therefore neglect in taking these exceptional risks into account when trading is like inviting disasters.

  • However there are exceptional strategies that provide reasonable returns with very limited risks. These strategies provide ways and means to reduce risks as well. This is a book about such strategies too. However success is always equal to the sum of expertise and luck.

Author: Cyriac Kandathil

Get in touch: syriacster@gmail.com ; Phone: 001 481 2392630

Derivatives- The Boogeyman’s stick

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Derivatives- The Boogeyman's stick

Derivatives- The Boogeyman’s stick

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Blaming derivatives for human failures is quite unfair. Those who used derivatives to reduce their risks have never lost. But those who bought risks out of sheer greed have failed when unexpected developments happened.
Derivatives have their good sides and bad sides.In the hands of the misinformed they are weapons of mass destruction and Governments are forced to find ways and means to rescue them from going under due to far greater implications of their failures. These rescue efforts create moral hazards.
There are thousands of books written on derivatives showering praise on them. There are large numbers of derivative strategies that look very good and profitable on paper. Most of the books have not bothered to delve into the risks these strategies carry when put into practice. Many of them are directional strategies that make the trader take a view of the market before executing a particular strategy. It is practically impossible for an institution or an individual however informed to predict the future consistently in this global market, not to speak of the uninformed individual. That is why most of the so called wonderful strategies fail.

Author: Cyriac Kandathil

Get in touch: syriacster@gmail.com ; Phone: 001 481 2392630

Option strategies

Derivatives are designed to reduce risks of investors in stock markets, currency markets and commodity markets. Risk is inherent in all business activities. A ship is safe inside the harbor. However it faces risks when it moves out of its safe abode. But keeping a ship inside the harbor does not make any sense as it is made to carry goods across the seas facing contingent risks. Therefore business has to deal with the risk. Derivatives distribute business risks to others who are ready to take the risks for a return.
Derivatives were blamed for most of the financial disasters in the current times. Even informed investors like Warren Buffet termed Derivatives as “Financial weapons of mass destruction”. In fact derivatives are weapons of mass destruction in the hands of speculators who underestimate the risks they buy from others.
If the history of the financial failures in the recent past is scrutinized it will be clear that all the failures were caused due to the underestimation of risks by overconfident financial wizards. LTCM failed even though it had Nobel Prize winners in its Director Board. Barings Bank failed because the director board failed to understand the risks of giving too much power to employees without any control mechanism. Big insurance companies like AIG failed due to their underestimation of risks inherent in guaranteeing the sub-prime housing loans. Even Allen Green Span failed to estimate the implications of increasing interest rates. If he ever had an inkling of the implication of interest rate hikes on home loans he would have thought twice before increasing the interest rates. He would have reconciled to inflation as inflation in a booming economy is much better than a prolonged recession.

Author: Cyriac Kandathil

Get in touch: syriacster@gmail.com ; Phone: 001 481 2392630

DIY cookbook 2. How to stop losing money in stock market.

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In the last lesson we spoke about trend lines. Today we will talk about moving average.

A moving average is an average of the stock price over a given period of time. You will find some free charting tool like the one that I am using. You can also get a charting tool from your broker and usually it is free. Now what should you do?

  1. Open your stock on the chart. It is automatic. You will have to just select the name of the company.
  2. Select the EMA (Exponential Moving Average) option and select the number of days. In the chart above I have selected 200 days.

Once you have done this you will find the stock price crossing the moving average at times. Your objective is to consider the moving average as a level. If your stock goes below the average you sell.

Note: Just like trend lines consider the EMA that touches most of the bottoms of the chart. For that you will have to change the number of days of the EMA and see which one is the best. There is also SMA or Simple Moving Average but EMA or Exponential Moving Average is more accurate.

Give it a try, it’s not that hard and tell us what you think about it.

The above chart was drawn with Big Charts