basic risk management - s3. sensing the internet bubble was about to burst, ... + position size =...
TRANSCRIPT
BASIC RISK MANAGEMENT
- YOU WILL LEARN TO IDENTIFY SEVERAL KINDS OF COMMON RISKS
- YOU WILL LEARN ABOUT RISK AND CONTROL
- YOU WILL LEARN HOW TO USE THE COMPUTER TO CALCULATE RISK
- YOU WILL BECOME AWARE OF SEVERAL RISK MANAGEMENT TECHNIQUES
-YOU WILL DISCOVER HOW DIVERSIFICATION CAN ACTUALLY BE DANGEROUS
- YOU MORE ABOUT THE VITAL LINK BETWEEN RISK AND EDUCATION
RISK MANAGEMENT ONLINE TRAINING
IMPORTANT DISCLAIMER INFORMATIONTANNER TRAINING LLC IS PROVIDING THIS TRAINING AND ANY RELATED MATERIALS (INCLUDING NEWSLETTERS, BLOG POSTS AND OTHER COMMUNICATIONS) FOR EDUCATIONAL PURPOSES ONLY. WE ARE NOT PROVIDING LEGAL, ACCOUNTING, OR FINANCIAL ADVISORY SERVICES, AND THIS IS NOT A SOLICITATION OR RECOMMENDATION TO BUY OR SELL ANY STOCKS, OPTIONS, OR OTHER FINANCIAL INSTRUMENTS OR INVESTMENTS. EXAMPLES THAT ADDRESS SPECIFIC ASSETS, STOCKS, OPTIONS OR TRANSACTIONS ARE FOR ILLUSTRATIVE PURPOSES ONLY AND MAY NOT REPRESENT SPECIFIC TRADES OR TRANSACTIONS THAT WE HAVE CONDUCTED. IN FACT, WE MAY USE EXAMPLES THAT ARE DIFFERENT OR THE OPPOSITE OF TRANSACTIONS WE HAVE CONDUCTED OR POSITIONS WE HOLD. THIS TRAINING IS ALSO NOT INTENDED AS A SOLICITATION FOR ANY FUTURE RELATIONSHIP, BUSINESS OR OTHERWISE, BETWEEN THE STUDENTS OR PARTICIPANTS AND THE TRAINER. NO EXPRESS OR IMPLIED WARRANTIES ARE BEING MADE WITH RESPECT TO THESE SERVICES AND PRODUCTS.
ALL INVESTING AND TRADING IN THE SECURITIES MARKETS INVOLVES RISK. ANY DECISION TO PLACE TRADES IN THE FINANCIAL MARKETS, INCLUDING TRADING IN STOCK OR OPTIONS, IS A PERSONAL DECISION THAT SHOULD ONLY BE MADE AFTER THOROUGH RESEARCH, INCLUDING A PERSONAL RISK AND FINANCIAL ASSESSMENT, AND THE ENGAGEMENT OF PROFESSIONAL ASSISTANCE TO THE EXTENT YOU BELIEVE NECESSARY.
IGNORANCE COMPETENCEAWARENESS PROFICIENCY
PHASE 1 PHASE 2PHASE 0 PHASE 3
401 K MUTUAL FUNDS
HANDS OFF
LITTLE OR NO FINANCIAL EDUCATION
ADVANCED CLASSESSELECT YOUR STYLE
BASIC CLASSESMENTOR
MARKET LABS
SPECIFIC RULES DETAILS
SELECT YOUR STYLE
STRATEGIESVOCABULARY
CONTEXT CLASSES
EXPERIENCEPRACTICE INCOME!
MARKET LABS
ANDY’S EDUCATION CONTINUUMTM
FUNDAMENTALANALYSIS
TECHNICALANALYSIS
CASH FLOW RISK MANAGEMENT
STRENGTH OF AN ENTITY STRENGTH OF A MARKETEARN UP, DOWN,
SIDEWAYSEXPECT THE UNEXPECTED
FOUR PILLARS OF INVESTING
RISK VOCABULARY NON SYSTEMIC RISK
BRITISH PETROLEUM OIL SPILL
“DON'T PUT ALL YOUR EGGS IN ONE BASKET”
DIVERSIFICATION IS JUST A “FLU SHOT”
FLU ARE ONLY FOR THE FLU!THEY DO NOT OFFER PROTECTION
AGAINSTHEART DISEASE
DIVERSIFICATION IS JUST A “FLU SHOT”
“DON'T PUT ALL YOUR EGGS IN ONE BASKET” DIVERSIFICATION ADDRESSES
NON-SYSTEMIC RISK ONLY!IT DOES NOT OFFER PROTECTION
AGAINSTSYSTEMIC RISK
RISK VOCABULARY NON SYSTEMIC RISK SYSTEMIC RISK
BRITISH PETROLEUM OIL SPILL
SUB PRIME MORTGAGE MELTDOWN
SOVEREIGN FUNDAMENTALS IMPACT SYSTEMIC RISK
PURCHASE RISK
$1/GALLON $10/GALLON
HOPE = NO CONTROL
“I HOPE MY STOCK COMES BACK”
“I HOPE UNEMPLOYMENT IMPROVES”
“I HOPE I CAN RETIRE”
“I HOPE THE MARKET RECOVERS”
RISK IS RELATED TO CONTROL
ARE YOU HOPING...
...OR BUILDING?
RISK IS RELATED TO CONTROL
NO CONTROL
STOCK & MARKET DIRECTION
MAJOR EVENTS
SOVEREIGN & CORPORATE FISCAL POLICIES
TOTAL CONTROL
CASH FLOW STRATEGY
PERSONAL FISCAL POLICIES
EXIT STRATEGY
“INSURANCE”
POSITION SIZE
ASSET ALLOCATION
FINANCIAL EDUCATION
NO CONTROL
FUNDAMENTALANALYSIS
TECHNICALANALYSIS
CASH FLOW RISK MANAGEMENT
CONTROL
WE CAN’T CHOSE WHAT THE DATA SAYS WE CAN CHOOSE HOW TO HARVEST IT
BASIC RISK MANAGEMENT TOOLBOX
STOP LOSS ORDERS
NON CORRELATING ASSETS
POSITION SIZING
PROTECTIVE PUT OR CALL OPTIONS
REWARD RISK RATIOS
REWARD RISK RATIOS
REWARD = $20 RISK= $10
WIN/LOSS PERCENTAGE = 50%
WINNERS LOSERS
-$10-$10-$10-$10-$10-$50
+$20+$20+$20+$20+$20
+$100
WHY EXIT STRATEGY INSTEAD OF BUY AND HOLD?
Lehman Brothers $691 billion
Washington Mutual $327.9 billion
WorldCom $103.9 billion
General Motors $91 billion
CIT $71 billion
Enron $65.5 billion
Conseco $61 billion
Chrysler LLC $39 billion
Paci!c Gas and Electric Co. $36.1 billion
Texaco $34.9 billion
Global Crossing, Ltd. $30.1 billion
United Air lines $25.1 billion
Delta Air Lines $21.8 billion
$26 billion. Lucent Technologies
$1,624 TRILLION
NOTABLE BANKRUPTCIES
WHY EXIT STRATEGY INSTEAD OF BUY AND HOLD?
90
100
120
110
130
80
ENTRY
TARGET
EXIT
EXIT
TARGET
ENTRYENTER WHEN THE STOCK FITS YOUR CRITERIA
SET A TARGET THAT IS LIKELY TO BE ACHIEVED
PLAN YOUR EXIT POINT, BEFORE YOU ENTER THE POSITION
REWARDTHE REWARD IS THE DISTANCE BETWEEN THE ENTRY AND THE TARGET
RISK THE RISK IS THE DISTANCE BETWEEN THE ENTRY AND THE EXIT
5 BASIC POINTS TO IDENTIFY
SELECT...
MARKET
LIMIT
STOP MARKET
STOP LIMIT
LIMIT PRICE
$ 39.00
STOP PRICE
$ 39.00
BUY IF IT HITS $39 AT $39 OR
BETTER
STOP LIMIT ORDER
ENTER
TARGET
EXIT
ENTER = $39
TARGET = $45
EXIT = $37RISK = $2
REWARD = $6
BUY
SELL
BUY TO COVER
SHORT
QUANTITY
SYMBOL
100
SLV
BUY
SELL
BUY TO COVER
SHORT
QUANTITY
SYMBOL
100
SLV
SELECT...
MARKET
LIMIT
STOP MARKET
STOP LIMIT
LIMIT PRICE
STOP PRICE
$ 37.00
SELL IF IT HITS $37
ENTER
TARGET
EXIT
ENTER = $39
TARGET = $45
EXIT = $37RISK = $2
REWARD = $6
ORDER TO EXIT
PROTECTIVE PUT OPTIONS
$3.40 FOR THE CHOICETO SELL RIMM
@ $31BEFORE EXP
(OCT 2011)
BILLIONAIRE MARK CUBAN: “I WAS COVERED”
$20 - $2 = 90% LOSS
LOOK LIKE A GENIUS EITHER WAY
He had a company with $15 million in revenue. A year later, it sold for $5.7 billion in Yahoo! stock. "Just as shocking to me even now as it was then," says Cuban, laughing.
More than 300 employees also became millionaires - at least on paper. But Cuban, sensing that YAHOO shares would soar to even new heights, made his shrewdest move. He negotiated the sale of his company for stock instead of cash.
"I was bullish," says Cuban. "And then some."
Self-Made MaverickCorrespondent Steve Kroft
He had a company with $15 million in revenue. A year later, it sold for $5.7 billion in Yahoo! stock. "Just as shocking to me even now as it was then," says Cuban, laughing.
More than 300 employees also became millionaires - at least on paper. But Cuban, sensing the Internet bubble was about to burst, made his shrewdest move. He began unloading his Yahoo! stock, using a hedging strategy that would lock in his profits.
"I was covered," says Cuban. "And then some."
Self-Made MaverickCorrespondent Steve Kroft
$20 - $2 = 90% LOSSHe had a company with $15 million in revenue. A year later, it sold for $5.7 billion in Yahoo! stock. "Just as shocking to me even now as it was then," says Cuban, laughing.
More than 300 employees also became millionaires - at least on paper. But Cuban, sensing (his house was going to burn to the ground), made his shrewdest move. He began unloading his Yahoo! stock, using a hedging strategy that would lock in his profits.
"I was covered," says Cuban. "And then some."
Self-Made MaverickCorrespondent Steve Kroft
IF CUBAN WAS “SENSING THE INTERNET
BUBBLE WAS ABOUT TO BURST,” THEN WHY NEGOTIATE FOR STOCK INSTEAD OF CASH?
“SHREWDEST MOVE” OR COMMON SENSE?
USE THE COMPUTER
MORE OF USING OPTIONS FOR RISK MANAGEMENT
I
E
A L
SELL A CALL OPTION FOR $5.17
OWN 100 SHARES @
$43
BUY AN PUT OPTION
$42 STRIKE
BUY A PUT OPTION FOR $4. 72
.45
YOU MAKE A PROMISE TO SELL
YOUR STOCK @ $43
HE HAS THE CHOICE TO BUY
YOUR STOCK@ $43
CORRELATING ASSETS
NON- CORRELATING ASSETS
INVERSE CORRELATING ASSETS
NON- CORRELATING ASSETS
POSITION SIZING
CASINOS PUT A LIMIT ON HOW MUCH THEY WILL RISK IN ONE HAD OF BLACKJACK CALLED A
“TABLE LIMIT”
POSITION SIZING
WIN/LOSS PERCENTAGE
TABLE LIMIT+ = ADVANTAGE
18 18 2 $100 (EARNINGS)
POSITION SIZING EXAMPLE
WIN/LOSS PERCENTAGE
POSITION SIZE+ = ADVANTAGE
FUNDAMENTALS TECHNICALS
1% TOLERANCE (EARNINGS)
INTERMEDIATE STRATEGIES: DELTA HEDGING
SELL A PUT FOR $11.40
DELTA = .45
BUY 45 SHARES
BASIC RISK MANAGEMENT TOOLBOX
STOP LOSS ORDERS
NON CORRELATING ASSETS
POSITION SIZING
PROTECTIVE PUT OR CALL OPTIONS
REWARD RISK RATIOS
EDUCATION
RISK REWARD
RISK
REWARD
RISK
EDUCATION
TRADITIONAL VIEW MY VIEW
IGNORANCE COMPETENCEAWARENESS PROFICIENCY
PHASE 1 PHASE 2PHASE 0 PHASE 3
401 K MUTUAL FUNDS
HANDS OFF
LITTLE OR NO FINANCIAL EDUCATION
ADVANCED CLASSESSELECT YOUR STYLE
BASIC CLASSESMENTOR
MARKET LABS
SPECIFIC RULES DETAILS
SELECT YOUR STYLE
STRATEGIESVOCABULARY
CONTEXT CLASSES
EXPERIENCEPRACTICE INCOME!
MARKET LABS
ANDY’S EDUCATION CONTINUUMTM
YOU HAVE JUST COMPLETED
BASIC RISK MANAGEMENT
CONGRATULATIONS!