RISK

[bullmarket]

Hi porper

Bullmarket, I am not saying set the stop at break even and to leave it there, that would be irresponsible to the extreme.What I am saying is once this is done, we are in a risk free trade, then it is up to us to manage the price action as we feel fit, whether that be a trailing stop, count back or whatever.

As for taking profits, well I don't consider myself an expert,I get it wrong as often as I get it right.If anybody says they consistently get out near the top, I would love to talk to them and find their method, or call them a wee fibber !!

Anyway, must go and peel the spuds and sprouts or Mrs Porper will peel me

ok no problem I can see more clearly now what you are saying and fair enough

and good luck with the spuds - I know exactly how you feel

I'm getting away with spending time in here today because I'm also watching the Comm games on the portable out the back with mrs bullmarket and checking in here whenever I come inside to refill her glass

cheers

bullmarket

 

[It's Snake Pliskin]

So if you or Snake don't understand or agree with what I was saying then I don't have a problem with that simply because others have at least understood and whether they agree or not is entirely up to them. I just gave my view on paper losses and a supporting example.

Bullmarket,

I understand that you don`t know what you are on about. :1zhelp:
So what is a paper loss exactly? I don`t know. :dunno: Please validate your point that I have not understood, that`s if Mr Bullmarket lets you....ahh, sorry MRS B>

 

[bullmarket]

Hi snake

I'm not convinced you are telling the truth when you say you don't know what a paper loss is

have a pleasant evening and I'll see you in the swamp

bullmarket

 

[It's Snake Pliskin]

Hi snake

I'm not convinced you are telling the truth when you say you don't know what a paper loss is

have a pleasant evening and I'll see you in the swamp

bullmarket

Bullmarket,

I`m saying I don`t, so please don`t avoid the question and please tell me what I don`t understand.

 

[ducati916]

100% negative outcome = No Risk
100% positive outcome = No Risk

Therefore through "a priori" reasoning we can state;
Risk = Uncertainity of a specific outcome.

Relevant to us, and our classification of RISK, we would fall under the further clarification of speculative risk. as opposed to say pure risk.

Within speculative risk we participate within the financial markets.
The financial markets encompassing for this purpose, Stock markets, Futures markets, Options markets, Currency markets, Commodities markets, CFD's markets.

Generalising a little, the financial markets are composed of three types of analytical participants, Fundamentals, Quants, Technicals.
Each style of analysis utilizes very different methodologies in measuring opportunity

Opportunity is then via analysis quantified into a hard number that represents potential risk, and a hard number that represents potential reward.

As a point of separation the analysis is performed on very different analytical data inputs. Fundamentals measure and quantify Business risk. Technicals measure and quantify Market risk

The two sources of data provide potentially very different quantifications of Risk & Reward for the same security.

Market risk is measured by Price
Therefore the studies as expounded via Fama et al. within Efficient Market Theory are the benchmark that adequately explain Market risk.

Business risk is measured via Capitalization structure, Operational results, and Intangibles and as a consequence pays no heed to Market risk
Thus, cannot be included within EMT
This has given rise to further theories that operate in tandem with EMT, and have simply been labeled Inefficient Market Theory the irony being that if both operate as postulated, that in longer timeframes, you will achieve a true EMT

Intrestingly some common words keep cropping up that are used out of the correct context;

Probability
Refers to the mathematical concept of statistical significance
If you use "PROBABILITY" within your argument of RISK, you are really saying that you have designed a statistical model for your theory, that conforms to rigourous statistical methodology, (which uses the Law of large numbers) and that through the testing of this statistical model, you have achieved a result that possesses STATISTICAL SIGNIFICANCE to a specified CONFIDENCE LEVEL

If you have not performed this work, you are incorrect in referring to the term probability you are in point of fact referring to a completely separate paradigm.

Which is a; Deterministic model
This is a very different model for the assessment of RISK than a model utilizing a probability based model

Risk management methodologies
Again two separate concepts have seemingly intermingled;
Stoplosses, and Diversification

Going on a bit, often written puts are described as having unlimited risk. Therefore straight shares, must also have unlimited risk. (It's not actually unlimited because you can't go past zero, but it is unquantifyable)

This is why folks use stops. Put writers can also use stops.

This nonsense appeared on pg1.
This really demonstrates the confusion, misinformation, or plain lack of cognitive analysis performed.

Lets just break it down;

Therefore straight shares, must also have unlimited risk. (It's not actually unlimited because you can't go past zero, but it is unquantifyable)

Common shares cannot go below zero.
Therefore your risk is quantifiable, it is a 100% loss of your capital.

Going on a bit, often written puts are described as having unlimited risk.

This is dependant upon the instrument that they are written against if they are written against common stock as a "PUT", then they have a limited loss as once the common (the underlying) falls to zero, the loss is 100% and the losses within the derivative are also limited.

If you have written a derivative against a derivative, that is calculated on an underlying, for example a Futures contract, derived from an underlying index (S&P500), then the loss will = 100% if and when the S&P500 index goes to zero as then the Futures contract will lose no more value, and your exposure via the written PUT against the futures contract will also = 100%

Of course there is a second factor that limits (potentially only) loss, and that is the expiry and exercise date

The Option that exposes you to theoretical unlimited risk, is the Naked Written CALL with a long in the future expiry.
This is true because, in theory we can not quantify risk in the same way.
The "Price" can go from $1 to $10, to $100, to $1000, to $100K per share and even further, therefore we can never write RISK = 100%

This is why folks use stops. Put writers can also use stops.

Yes they can.
However this is not a "guaranteed" or hard stop equivilent to the product listed by Maquarie with CFD's. Therefore, your risk is only managed at your eventual exit point. So excluding the aforementioned example, stoplosses are a risk management tool, but are not definitive of your ultimate risk.

jog on
d998

 

[wayneL]

:band

 

[stevo]

100% negative outcome = No Risk
100% positive outcome = No Risk

Known outcome = No Risk

stevo

 

[Bobby]

:band

Love the band ! : .
How appropriate ~~~.

Bob.

 

[tech/a]

Ah Duc.

Excellent some understanding of RISK

You may have to use some examples which are easy for all to follow.
Stevo's put in some intesresting stuff as well.
Hopefully I'll have some time to get "involved" soon enough.

 

[ducati916]

stevo

Known outcome = No Risk

Indeed.

tech/a

Jump in whenever baby!

Diversification was adopted, or borrowed from the Insurance industry, from which it forms the underpinning of underwriting risk
It was incorporated into the financial markets, as it had worked very successfully, over a long period of time, and a large number of individual cases, providing a statistically significant result, with a high confidence level to the results.

There are however some important differences.
If underwriting life insurance, the statistical body of evidence gathered over many years, added to medical statistics regarding mortality rates, due to age, accidents, disease, etc. provided Actuaries with hard data, that changes very little over time.

In the stock market, we have to utlize diversification within two separate classes of risk. alpha risk, and beta risk
Which due to the competitive and secretive nature of the markets makes the aquisition of hard data quite challenging.

alpha risk, is the risk that is better described as business risk that will incorporate the following risks;
Peril,
Physical hazard
Moral hazard
Static risk
Dynamic risk,
Fundamental risks
Particular risks,
Speculative risk
Pure risk,
Liability risks
Failure risk,
Act of God.

beta risk, is Market risk, and most easily observed as "Price movement".
The beta assigned to individual stocks reflects their past volatility, as compared to the benchmark index, of which they are a member.

Both stoplosses, and diversification can be utilized in tandem, or individually, or of course, not at all. There are situations, according to the type of risk, or the amount (risk exposure) that one may be preferrable to the other.

jog on
d998

 

[wayneL]

This nonsense appeared on pg1.
This really demonstrates the confusion, misinformation, or plain lack of cognitive analysis performed.

non·sense Audio pronunciation of "nonsense" ( P ) Pronunciation Key (nnsns, -sns)
n.

1. Words or signs having no intelligible meaning: a message that was nonsense until decoded.
2. Subject matter, behavior, or language that is foolish or absurd.
3. Extravagant foolishness or frivolity: a clown's exuberant nonsense.
4. Matter of little or no importance or usefulness: a chatty letter full of gossip and nonsense.
5. Insolent talk or behavior; impudence: wouldn't take any nonsense from the children.

Main Entry: con·fu·sion
Pronunciation: k&n-'fyü-zh&n
Function: noun
: disturbance of consciousness characterized by inability to engage in orderly thought or by lack of power to distinguish, choose, or act

misinformation

n : information that is incorrect

cog·ni·tive Audio pronunciation of "cognitive" ( P ) Pronunciation Key (kgn-tv)
adj.

1. Of, characterized by, involving, or relating to cognition: “Thinking in terms of dualisms is common in our cognitive culture” (Key Reporter).
2. Having a basis in or reducible to empirical factual knowledge.

cog·ni·tion Audio pronunciation of "cognition" ( P ) Pronunciation Key (kg-nshn)
n.

1. The mental process of knowing, including aspects such as awareness, perception, reasoning, and judgment.
2. That which comes to be known, as through perception, reasoning, or intuition; knowledge.

The above denunciation appears to revolve around my use of the the "unquantifiable"

Main Entry: unquantifiable
Part of Speech: adjective
Definition: unable to be counted or to have a value assigned; impossible to determine the quantity of

In the strictest sense, the maximum risk of a written put is quantifiable as far as ordinary shares are concerned, in that the same may indeed go to 0 and no further. With futures however, because of the nature of the underlying, this is unlikely to ever be the case. So maximum risk, in this case, is indeed unquantifiable.

However, I am comfortable discarding this term in favour of "indeterminable"

in·de·ter·min·a·ble Audio pronunciation of "indeterminable" ( P ) Pronunciation Key (nd-tûrm-n-bl)
adj.

1. Impossible to fix or measure: indeterminable traces of poison; indeterminable assets.
2. Impossible to settle or decide with finality: indeterminable questions.

Athough the presense of 0 may ultimately quantify our maximum risk in a limited number of cases, it is impossible to determine the extremely unlikely probability of such an event ever occuring in those cases where it is possible.

Certainly the risk of a written put (naked that is) is NOT unlimited. It is questionable whether the risk is quantifiable or not; in some cases is is certainly not quantifiable. So indeterminable seems to be the best fit.

I now turn to the written, naked call. Most textbooks, and indeed certain members of this very forum refer to the risk as "unlimited".

un·lim·it·ed Audio pronunciation of "unlimited" ( P ) Pronunciation Key (n-lm-td)
adj.

1. Having no restrictions or controls: an unlimited travel ticket.
2. Having or seeming to have no boundaries; infinite: an unlimited horizon.
3. Without qualification or exception; absolute: unlimited self-confidence.

Again an arguable point. Unlimited infers the infinite, whereas the risk of a written call is eminently limited by the maximum price people are prepared to pay for the asset. And there will always be a maximum price. Since we are indulging in extreme pedancy, (if that is a word) we must abdicate this inaccurate term, in favour of either unquantifiable or indeterminable, both of which are accurate.

Refering back to the original statement which I quoted above, and an examination of language contained therein, I can only conclude were written for reasons other than for accuracy of facts and reasoned debate. This is in contrast to the other excellent points in the rest of the post. However I will put it down to "hyperbole" an leave it at that.

hyperbole

n : extravagant exaggeration [syn: exaggeration]

Cheers

 

[It's Snake Pliskin]

Ah Duc.

Excellent some understanding of RISK

You may have to use some examples which are easy for all to follow.
Stevo's put in some intesresting stuff as well.
Hopefully I'll have some time to get "involved" soon enough.

No give us the hard ones!

All from the alchemy of finance too! :blaah:

 

[It's Snake Pliskin]

100% negative outcome = No Risk
100% positive outcome = No Risk

This is wrong!

A negative result would cost you money. If so you have risked money!

A positive result would make you money. If so you have risked money to get that result!

Stevo put it right by saying "Known outcome = no risk". So if you know the outcome you wouldn`t be risking anything, as there would be a known outcome- something like 100% guaranteed.

 

[tech/a]

You are equating Risk with money.

In these instances Risk alone is equated.
You have 2 knowns each resulting in zero risk.

If you wish to relate that back to money then entering a trade with a known
risk of 100% loss would not be equated as taking any risk what so ever,youll have NO risk of making any profit yet 100% guarentee of making a loss.

The decision is then not risk based---more to do with stupidity I would argue.
(Nothing personal Snake!)

This is important as the discussion continues.

 

[It's Snake Pliskin]

You are equating Risk with money.

Yes I am.

In these instances Risk alone is equated.
You have 2 knowns each resulting in zero risk.

If you wish to relate that back to money then entering a trade with a known risk of 100% loss would not be equated as taking any risk what so ever,youll have NO risk of making any profit yet 100% guarentee of making a loss.

But you would still lose money if you took it on, so it would be a guaranteed loss of money, more so than risk of money. The point I made about stevos comment. But in reality nothing is known especially in the markets, nothing is guarnateed! So, who would take on a 100% guarantee of loss?

Is this thread guarantee or risk?

Sorry..(no offence tech)
It all seems pointless as in the markets we risk money - ultimately, unless something has changed and no one told me about it. So a discussion on that is what I thought the thread was for. If it is textbook definitions and regurgitation then I have extracted myself form the discussion. I get the gist of Wayne`s post to see how ridiculous it has become - not Wayne but the hyperbole!

Have a nice day all.

Snake

 

[tech/a]

Patience Snake.

To discuss something with a broad and often un informed view of the topic will result in disjointed and irrelevant outcomes.
Your input is great and so is "most" others which raise question and define points of veiw in specific terms.

All will slowly come together into something useful---well more than useful--damned necessary.

 

[It's Snake Pliskin]

Lets see where it goes then..... As for me I`m off for coffee.

 

[ducati916]

Snake

I see that tech/a has already corrected your misunderstanding of my previous post with regard to a definition of risk.

It all seems pointless as in the markets we risk money - ultimately, unless something has changed and no one told me about it. So a discussion on that is what I thought the thread was for. If it is textbook definitions and regurgitation then I have extracted myself form the discussion. I get the gist of Wayne`s post to see how ridiculous it has become - not Wayne but the hyperbole!

Interesting point of view.
I suppose you would rather then be subjected to inaccurate opinion, rather than accurate and commonly accepted finance theory?
Of course, if you have a problem with commonly accepted finance theory, and I very often do myself, then by all means highlight the offending theory, and offer your refutation, based on whatever argument that you feel is pertinent.

All from the alchemy of finance too!

This unfortunately, is just nonsense.
As by way of evidence for refutation of said nonsense, see the following link;

http://lightning.he.net/cgi-bin/suid/~reefcap/ultimatebb.cgi?ubb=get_topic;f=25;t=000140

jog on
d998

 

[bullmarket]

I think everyone in here understands the overall concept and definition of risk and imo stevo summed things up very well in his earlier post where he clearly defined risk and pointed out a half dozen or so subsequent relevant points. I agree 100% with stevo's points as they are essentially the premise I used for coming up with the way I manage my risk in my fundamental and technical analysis. After stevo's post I haven't seen any post that wasn't essentially covered already by him.

For anyone interested in doing some research on risk analysis there is an absolute plethora of info on the www. I googled 'calculate portfolio risk' and it came back with a truck load of sites.

Calculating risk is by no means a trvial task and so can require extensive number crunching which the average trader would not even consider doing - and I suppose that is why no-one has posted any algorithms for actually calculating risk for a particular scenario

But for anyone interested in an overview of risk management maybe have a look at this site which is just 1 of thousnds returned from google.

From what I see, imo this thread is now slowly starting to go round in circles and spiral inwards to the point where everyone will soon be staring at their own navels and wondering what the hell they are looking at

I think I'll research info on 'risk' from hereon on the www where for me personally it will be more relevant and meaningful.

cheers

bullmarket

 

[tech/a]

I think I'll research info on 'risk' from hereon on the www where for me personally it will be more relevant and meaningful.

Excellent.
We will all speak amongst ourselves then without further input from you.

Navel gazing should be treated in a seperate thread.
You may wish to host it.

Enjoy your research.