Let's say that you are certain that the price of a stock is going up in the near future. You don't know how much it will go up, only that it most certainly is not going to decline. Of course, this is not necessarily a realistic situation, but let's say you are 100% sure that the stock won't decline and want to bet money on it. What instruments would you use to get the highest profit assuming that your view is correct? Assume that you cannot borrow money to leverage such a risky investment depending only on the outcome of one stock.
Best instrument/method for speculation?
- Thread starter JJH
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If the growth rate is less than the risk free rate, you can still "lose" money.
Unless Im interpreting this wrong?
Unless Im interpreting this wrong?
Correct, but assume the risk free rate is so small (for example, for a period of one week) that it is not relevant for the question.
Joy Pathak
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alain
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This is better than the disclaimer.
Forward contract
Futures and options require margin. Forwards might require collateral depending on your credit quality and prime broker .
Notice...my assumptions about you(having ability to enter into a forward) are just as realistic as your question.
THIS IS NOT FINANCIAL ADVICE.
Ok, what about CFDs (Contract For Difference)? Essentially the same thing?
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i think in-the money calls will give you decent ROE. obv more leverage will cost u in TV decay.
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OTM calls will give you more leverage, e.g. more delta for each dollar invested. Though it will cost you more in theta decay, as iHateVariance said.
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Sounds like an interview question, hence maybe the no leveraging angle?
Joy Pathak
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It is a very common interview question.
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Look to buy call spreads for a debit. No margin is required. Long leg of the spread to be ATM. The call spread will be long gamma long to neutral vega and short theta. In the case the stock does not move at all the short leg of the spread will lose theta faster than the ATM long leg and as such you could be making money on the spread even with no underlying movement. In my mind there are a lot of better option strategies that payout better given the information above, however, they require the use of margin.....
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if all you know is that it is not going to decline then just sell tons of atm put options, collect the premium, and invest it at the risk free rate. alternatively you could spend the free money you've collected on women and bottles of champagne since the bernanke has made it pointless to invest at the risk free rate. in any case, no sense in paying for the call options (i.e. entering into a forward contract) if all you know is it's not going down but not that it will go up much. also dont worry about theta and gamma and all those make believe things since the fact that its definitely not going down makes these things meaningless anyway.
THIS IS GOOD FINANCIAL ADVICE
THIS IS GOOD FINANCIAL ADVICE
DominiConnor
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Assuming that your certainty is well founded (and legal), then you must have a process for determining future stock prices.
Since it is a process, it is presumably repeatable and explainable to a 3rd party to whom you can sell it.
Since it is a process, it is presumably repeatable and explainable to a 3rd party to whom you can sell it.
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If you had "a process for determining future stock prices," you'd sell it?
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