Posts Tagged "flip side"

Options Gurus Set Up Paid Educational Website

Posted by Preet on Mar 14, 2010 | 1 comment

I use options in my own portfolio but only rarely write about them. I will try to write more option-related material in the future, but for those who are interested in learning more right away you might be interested in a new site set up by some of the top option bloggers on the internet. The new website is called “Expiring Monthly“.

One of the contributing authors is Dr. Mark Wolfinger, and you may want to read the interview I had with him on this blog by clicking here. I consider him to be a real straight shooter and so when he approached me to help promote his site there was absolutely no hesitation on my end. However, he did indicate that he was offering affiliate commissions for referrals to the site who end up subscribing, so in the interests of disclosure let me make it clear: I receive monetary consideration for people who sign up for the Expiring Monthly website (price is $99/year).

I realize that over the weekend I had posted an affiliate link for Questrade, but rest assured the back-to-back affiliate offers are simply a matter of coincidence. I don’t actively look for affiliate opportunities, and it will probably be months and months before you see another, and it will always be disclosed. The flip-side is that I’m planning on giving away an iPad on the blog in the near future (as soon as they are available for pre-order in Canada which should be in a few weeks).

I’ll let the guys behind Expiring Monthly provide their own commercial and simply cut and paste their introduction page below, but the amount of knowledge Dr. Wolfinger gives away on his blog for free is testament to the value he can provide. Now multiply that by 5 authors.

I normally don’t endorse anything on this blog, but if you have ever considered signing up for one of those ridiculous option trading system seminars which you pay $1000 for a three day workshop near you and promise you that you can quit your job and sustain yourself trading options, save yourself. In this case, I would say you should really consider Expiring Monthly as you will learn practical, no nonsense information.

So, like I said – if you have an interest in options trading check it out. If not, then stick around anyways because I’ll be announcing an iPad giveaway in the near future for having to put up with the back to back affiliate posts! :)

One final note – they are holding a raffle for all people who sign up for their website and prizes will be a number of books and an private mentoring session with an options trading pro.

Now to Expiring Monthly’s description:

*****

Expiring Monthly is the brainchild of five of the top options bloggers on the Internet:

Our goal is to provide a monthly magazine in digital format that’s informative to new option traders, yet interesting to the most experienced traders.

If you trade options, Expiring Monthly is your magazine.  We never want you to outgrow this publication

Every issue of Expiring Monthly contains a Feature Interview and an Extended Feature Article.  Our Follow The Trade feature tracks at least one trade per month from entry to exit, with appropriate commentary.

We have a few humorous trading anecdotes, along with all the insight, analysis,  market commentary, and trading tips you expect from our writers.

More features are planned, including Book Reviews.  If you suggest a feature, we’ll give it serious consideration.

*****

Click here for more information: Expiring Monthly Website.

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Risk: Systematic Risk vs Non-Systematic Risk

Posted by Preet on Jul 26, 2007 | 0 comments

This is an advanced level topic – you may want to skip this post if you are just finding your feet with respect to finances! It assumes a basic understanding of portfolio diversification…

ChasingTheMarketsOrRisk.jpgWith respect to any given stock market there are two types of risk (which is another word for variance according to Modern Portfolio Theory): 1) Systematic Risk and 2) Non-Systematic Risk. Systematic risk is the general ebb and flow of the market – kind of like the tendency for all stocks to get dragged down or move up in tandem at the same time to a certain degree.  For example, the 1987 market decline was a Systematic event in that it really didn’t matter what you owned, it probably went down.  Is it warranted? Yes and no, but a main thing to consider is that nothing probably happened to any one stock to make it lose value in and of itself that day, but rather there was a general expectation or fear of a downturn in the economy linked to the market that caused everything to move. SYSTEMATIC RISK CANNOT BE DIVERSIFIED AWAY.

Non-Systematic risk CAN be diversified away. The best way to describe it is to build an analogy. Let’s say you owned one stock – if that company went bankrupt you will have lost 100% of your portfolio. If you owned 100 stocks, and 1 comany went bankrupt you would have lost 1% of your portfolio. On the flip side, what if that one company doubled in value? You either doubled your money or only gained a measley 1% if you held 1 stock or 100, respectively.  So this analogy builds a case against diversifying too much, but making sure you diversify a little. Non-Systematic risk is like the individual risk associated with the company linked to the stock – if it goes bankrupt – that is non-systematic risk and has nothing to do with the general ebb and flow of the market overall.

So, I mentioned that non-sytematic risk can be diversified away. It is generally debated as to how many securities you need to hold to get rid of non-systematic risk. You see, just as one company might go bankrupt, one company in your portfolio might double in value.  And one company might increase by 25% and one might decrease by 25%. So most recent research papers tend to think that 15-20 securities is enough to get rid of non-systematic risk. They suggest that trying to diversify by adding more securities than that is pointless as you may be adding stocks that do not have as rosy a prospect as the initial 15 or 20.  They further argue that for those that over-diversify by having 100 securities from the same market have bought alot of garbage for the sake of diversifying and will not reap the same long term returns as someone who has been more picky with their money.

Since it is agreed that non-systematic risk can be diversified away, and systematic risk cannot – it is plain to see that the goal for a rational investor is to do just that.  So the debate is really how many securities do you need to eliminate non-systematic risk? For now, I would tend to agree that 15-20 is optimal within any given market to eliminate non-systematic risk.  Anything beyond that and you are buying ”filler” and reducing your long term rate of return – truly an irrational goal! :)

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