Trader! Trader! Trader!
I couldn't resist. I have been doing such a great job focusing on long-term investing, but... the blind irrationality of the market today just sucked me in. It was a combination of prices looking cheap and anticipation of the "pain" of lower interest income on idle money. I had a relatively small amount of cash sitting in a couple of old accounts left over from the dot-com boom. Earning 5% income had been a great incentive not to do anything with the cash, but the confluence of so many factors today just made it a no-brainer to put that small amount of cash to work.
I bought July 35 call options on Microsoft. The stock was sitting at $32.133 and had traded above $35 a couple of times in the past six months and the company has only been getting stronger over the past year, so it seemed like a relatively low-risk bet. I bought a batch of call option contracts in an old Roth IRA account and then a second batch in a taxable account a few minutes later at a lower price. The price for the first batch was $1.51 or $151 per contract (100 shares) -- hardly more expensive than buying a "lottery ticket." Stock prices were quite volatile, so I was able to get the second batch at $1.41 or $141 per contract.
My expectation is to hold the options for two to four months and be sure to dump them at least six weeks before they would expire in July. At least that is my intention. OTOH, I would probably dump them immediately if the stock ever gets above $40.
Just to be clear, it is important to treat stock options as "lost money" and mentally pretend that 100% of the "investment" is completely gone and that the "value" only goes above $0.00 when you finally sell the options. As I suggested, think of call options as lottery tickets.
It is okay to do this kind of thing once in a while and be sure to not make it a habit and to be sure to do it only with a small amount of free cash that you are 100% prepared to lose, but the confluence of irrationality today really was one of those "black swan" moments (the Fed cutting by 0.75% inter-meeting??!!) that does not present itself on a frequent basis.
BTW, it is sounding as if the fiscal stimulus package will be even biigger than the 1% of GDP that was being proposed.
Now, back to contemplating the pain of a measly 3% interest on money market funds. Sigh.
-- Jack Krupansky
posted by Jack Krupansky @ 11:52 AM
2 Comments
2 Comments:
Jack writes:
(the Fed cutting by 0.75% inter-meeting) is a "black swan" moment.
Interesting. I had always thought of a "black swan" as Frank Knight's "uncertainty" or Rumsfeld's "unknown unknowns".
There must be competing definitions of what a "black swan" moment is.
Care to define yours?
"When I use a word," Humpty Dumpty said, in a rather scornful tone, "it means just what I choose it to mean -- neither more nor less."
"The question is," said Alice, "whether you can make words mean so many different things."
"The question is," said Humpty Dumpty, "which is to be master -- that's all."
I use the phrase '"black swan" moment' to mean simply the occurance of an event that had been judged or would have been judged to be of very low probability. I believe that this is compatible with the sense that Taleb uses for "black swan."
Of course, a true "black swan" event would be one that we would not even contemplate as a remote possibility. That would be your unknowable unknown. But, I think Taleb's black swans are compatible with the merely improbable as well as the unknowable unknown.
More to the point, I do not think that anybody was considering that the Fed would be even considering an inter-meeting 0.75% rate cut last Friday. In other words, that a cut of that magnitude was not even one of the options in the Fed's toolkit.
I'll allow Taleb to decide which precise meaning he considers to be the master. And then I'll proceed to misuse the term anyway. That is the American Way!
-- Jack Krupansky
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