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| dc1pop |
 Posted: Wed Feb 09, 2005 8:19 am Post subject: What do you consider high risk investing? |
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Investing Associate
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What do you consider high risk investing?
So as my other topic on low risk investing what do you consider high risk investing?
Ive heard publication is a high risk long term investment as its hard to get into the publication market? |
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| jstep |
| Posted: Thu Feb 10, 2005 3:59 pm Post subject: |
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Investing Associate
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Hmm.. Id also like to know
I know hyi are
but I dont know what else you could consider?
certain stocks I guess (such as new companies?) |
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| ricekobe |
| Posted: Mon Feb 14, 2005 2:01 am Post subject: |
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Investing Associate
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| I consider new companies that could boom or bust as high risk. |
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| lmountford |
| Posted: Sun Feb 20, 2005 4:34 am Post subject: |
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Investing Sr. Associate
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| I agree, companies with less experience, less solid financing,less well established profile. |
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| pride |
| Posted: Wed Feb 23, 2005 7:29 am Post subject: |
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Investing Associate
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Stocks with a small capitalization (AKA small caps) are the most "risky" because they have the most price fluctuation. They are smaller, and thus harder to value because their earnings are less predictable, opposite of GE for example. I don't remember off the top of my head what the market capitalization level is for a stock to be considered small cap, but you could probably look it up on investorwords.com.
High yield bonds are also considered very risky because the company issuing the bonds usually has a credit rating of below B, meaning it has a fairly high risk of defaulting on the bonds. That's why the interest payment (coupon) on high yield bonds is higher.
Options are also very risky because it is essentially gambling. You are betting the price of a stock will more up or down within a given short term time frame. That's against the "investing for the long term" philosophy. |
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| CapM |
| Posted: Mon Mar 14, 2005 5:13 pm Post subject: Reply |
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Investing Associate
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Pride - quick comment on your options statement - options can be very risky investments, however, they can also be useful tools of portfolio managers, institutional investors, smart investors, that reduce the overall risk of the portfolio.
As you may be aware, a "put option", when bought, gives the investor the right to sell a particular stock at a predetermined price.
For example, let's say I own 200,000 shares of Disney (since it's so commonly discussed on this board). And, I think that there is a strong chance that Disney stock may plummet depending upon how well a new Antarctica Disney does during its first month of operation. However, I think that there is still a good possibility that it will do very well. Let's assume Disney is trading at $50 per share.
To protect my investment, I may want to buy PUT OPTIONS on Disney, that give me the RIGHT to sell all 200,000 shares at a set price of $47 per share.
If, when Antarctica Disney opens, it turns out to be a complete failure and the stock price falls to $20 per share, I am protected. I can now sell my 200,000 shares at $47 per share, even though the stock is currently trading at $20.
If instead, Antarctica Disney does very well, and the stock price raises to $70 per share, I'm ok. I don't need to cash in (excercise) my option to sell at the set price. I can just wait for the option to expire, and I'm only out the price I paid for the option (which is relatively small).
This strategy is called a "Protective Put", and is a very conservative strategy employed by many "sophisticated" investors.
Conversely, Options can be very risky, as you stated. Writing Naked Call Options can cost investors significant amounts of money.
I hope this helps. |
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| InvestingMac |
| Posted: Mon Mar 14, 2005 5:42 pm Post subject: Re: Reply |
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Investing Manager
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| CapM wrote: | Pride - quick comment on your options statement - options can be very risky investments, however, they can also be useful tools of portfolio managers, institutional investors, smart investors, that reduce the overall risk of the portfolio.
As you may be aware, a "put option", when bought, gives the investor the right to sell a particular stock at a predetermined price.
For example, let's say I own 200,000 shares of Disney (since it's so commonly discussed on this board). And, I think that there is a strong chance that Disney stock may plummet depending upon how well a new Antarctica Disney does during its first month of operation. However, I think that there is still a good possibility that it will do very well. Let's assume Disney is trading at $50 per share.
To protect my investment, I may want to buy PUT OPTIONS on Disney, that give me the RIGHT to sell all 200,000 shares at a set price of $47 per share.
If, when Antarctica Disney opens, it turns out to be a complete failure and the stock price falls to $20 per share, I am protected. I can now sell my 200,000 shares at $47 per share, even though the stock is currently trading at $20.
If instead, Antarctica Disney does very well, and the stock price raises to $70 per share, I'm ok. I don't need to cash in (excercise) my option to sell at the set price. I can just wait for the option to expire, and I'm only out the price I paid for the option (which is relatively small).
This strategy is called a "Protective Put", and is a very conservative strategy employed by many "sophisticated" investors.
Conversely, Options can be very risky, as you stated. Writing Naked Call Options can cost investors significant amounts of money.
I hope this helps. |
I certainly found that helpful, thank-you. |
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| Dave Rathbun |
| Posted: Tue Apr 12, 2005 8:41 am Post subject: |
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CFO
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There's another cool thing you can do with options too, called a Covered Call. I owned quite a few shares of ORCL stock (okay, I'll define "quite a few" as more than 1,000) a few years back. The stock was trading (pre split) in the 70-80 range. I had held the shares for quite a while, and my cost basis was around $15 per share. So I'm looking at a nice capital gain. 
I was interested in selling some of my shares, but was worried about a run-up in price. So one of my buddies sat down and explained covered call options to me. It works like this:
I already own the stock. So there is no risk there.
I want to sell the stock. No risk there.
I would like to sell the stock at $80, and it's currently trading at $75. So how am I going to find someone to buy my shares? With an option.
I "sell" a contract on my shares with a strike price of $80. Now with the stock trading around $75, I'm not going to get $5 for that contract. I might get about $1.50. But take that times a few hundred shares and it adds up. Once the contract is sold, I wait.
Options expire on the 3rd Friday of each month. If ORCL closed above $80 per share - let's say $82 - then someone is going to exercise my contract, and buy my shares at $80 and turn around and sell them for $82 and make a profit. I lose the extra $2 per share. But guess what... I already made $1.50 per share by pre-selling my stock. So I lost $0.50 per share in potential gains. That's if the stock closed over $80.
Now, what really happened? For three straight contracts that I sold, all of them at $80, ORCL closed below the strike price! What does that mean? It means someone gambled  that the stock would go up, and bought my contract, only to see that the stock didn't go up. Only a very strange person would exercise the option contract below the strike price. (But be advised that it does happen... it happened to the same buddy of mine that introduced me to the concept.) One month, in fact, ORCL closed on the strike day at 79 and 13/16, I kid you not.  So for a mere 3/16 of a dollar more I would have lost (sold) my stock.
Ultimately I did sell my ORCL shares via this covered call. But because of the number of option contracts - these covered calls - that I had sold, the stock was pure profit.
The best news? This all happened before ORCL dropped from $80 per share down into the $20 range.  These prices are all pre-split; ORCL is trading at about $11 now, so it hasn't moved much since I sold.
After typing all of this, I realized that this is NOT a high-risk investment, in fact, it's very safe. So it's not exactly on-topic for the forum, but I wanted to show that options - like the protective puts mentioned previously - are not automatically "high risk". |
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| InvestingMac |
| Posted: Tue Apr 19, 2005 1:09 pm Post subject: |
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Investing Manager
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| Interesting story. Thanks for sharing it. |
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| thrilla |
| Posted: Thu Apr 21, 2005 3:04 pm Post subject: |
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Investing Sr. Associate
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| Dave Rathbun wrote: | The best news? This all happened before ORCL dropped from $80 per share down into the $20 range. These prices are all pre-split; ORCL is trading at about $11 now, so it hasn't moved much since I sold.
After typing all of this, I realized that this is NOT a high-risk investment, in fact, it's very safe. So it's not exactly on-topic for the forum, but I wanted to show that options - like the protective puts mentioned previously - are not automatically "high risk". |
I just want to make a point of distinction that while selling covered calls may not seem like a high-risk investment, there is still a big element of risk involved with the stock itself. The point is that there is capital invested in the stock itself which has a likely possibility of dropping in price. The investor MUST have the stock in hand to sell covered calls. Therefore, an investment must be made to purchase the stock. In your situation, you made out nicely. However, if an investor entered the market at the wrong time and then started selling covered, the results could be equally disastrous.
Selling covered calls is a great way to hedge your investments, but it is not without presence of risk in that the initial investment in the stock could far outweigh income from selling covered calls. |
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| Dave Rathbun |
| Posted: Thu Apr 21, 2005 6:19 pm Post subject: |
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CFO
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A fair statement. But in reality, a covered call is only a little more risky than making a decision to sell the stock. As you point out, you must have the shares in your account to sell a covered call, so presumably you have already made the decision to purchase the stock. I don't know why you would buy the stock just to sell a covered call. I guess you could, but it doesn't really make sense. You would just do puts instead.
But I would further quantify that by saying that the risk is "known" with a covered call, while it can be completely unknown with other types of options. Any time you buy a stock the risk you take on is that the stock will become worthless. That is the maximum loss you can have... losing everything. So a covered call is just an "optional" sale of an asset that you own. The risk is that the stock goes higher than your option price + strike price. That's the amount of "loss" that you can encounter.
Strike price of $50, stock trading at $45, option sold at $2. If the stock goes to $52 then you have sold your stock and exactly broken even. If the stock goes to $51 then you have sold your stock at an extra $1 profit because of the option price. If the stock goes to $55 then you have "lost" $3 extra gain that you could have had if you had not sold your option. The benefit is that if the stock trades for anything $52 or under up to the expiration date you've come out ahead.
To take your example further... if I enter the market at the "wrong time" and sell covered calls, what happens? I make a profit on the covered calls (assuming a higher strike price) and the stock has lost value. With a naked option (no underlying stock) you've set a definite time horizon... the stock must move (up or down) within the time frame set in the option contract or you've lost. Owning a stock is not time sensitive; you can buy and hold and hold and hold and hold...
To summarize: covered calls are - in my opinion - only slightly more risky than owning stock itself. The upside is you might get to sell the stock many times (as I did). The downside is that you might actually sell your stock at a price you have specified in advance.  |
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| skankmofo |
| Posted: Mon May 09, 2005 5:38 pm Post subject: |
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New Poster
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about writing covered calls:
You are all ignoring the fact that if the stock drops a lot, yes you collect the money from selling the call, but then you're holding stock that lost a ton of value. If the stock was $45, you sell a $2 call with a strick of 50, if the stock drops to $40, you just lost $3 per share compared to just selling the stock.
Also, you lose liquidity. If the stock starts dropping a lot, say there's bad news and it drops down to 40 right after you sold the call and the stock now looks like it's going nowhere but down. If you didn't sell the call, you could just sell the stock and cut your losses, but now that you sold the call, you have to hold the stock as it drops. Granted, you could sell and just have a naked option, but a lot of brokerages don't allow that. |
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| Dave Rathbun |
| Posted: Tue May 10, 2005 2:40 am Post subject: |
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CFO
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| skankmofo wrote: | | You are all ignoring the fact that if the stock drops a lot, yes you collect the money from selling the call, but then you're holding stock that lost a ton of value. |
Yes, you raise a valid point. However...
You can "buy back" your option and sell the stock, or purchase a "put" option. Either of those will work. Buying back the option would likely be very cheap, once the stock drops, so you can still net a profit on the option. Then you can determine if you want to sell the stock or not.
The option price fluctuates based on two things: the underlying stock price, and the proximity to the option expiration date. If the option is for $50 and the stock is $55 and the expiration date is tomorrow, the option is going to price just about $5. If the stock is $45 and the option is $50 then the option will be extremely cheap, because the stock would have to rise 10% before the option is "in the money".
So in the scenario where the stock drops, suppose I sold the option for $2. I might buy it back for 10 cents, and still own the stock. Or I can elect to sell the stock if I think the underlying principles that caused me to buy the stock have changed. |
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| skankmofo |
| Posted: Wed May 11, 2005 6:59 am Post subject: |
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New Poster
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option price actually fluctuates on three things according to the black scholes formula, the time until expiration, the underlying price of the stock, and the volatility of the stock. volatile stocks have higher option prices.
volatility is actually the most important factor because it is the hardest to estimate. you know the expiration date, and the stock price, but if you want to value whether an option is worth buying/selling at a certain price you should look at how volatile it is. |
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| pass |
| Posted: Fri Aug 05, 2005 8:50 pm Post subject: |
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meridia - *Link Removed*
Please don't spam the forum.
-Admin |
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