THE INSURANCE OUTLOOK

April 2, 2010 in Ideas & Strategies

I SEE A FEW WAYS TO LOOK AT THE TRADING STRATEGIES AT MY AVAIL: THE INVESTOR, THE RENTER, THE INSURER.

THE INVESTOR FINDS GOOD PICKS ATTEMPTS TO ASSESS DIRECTION AND BANKS ON THEM BEING WINNERS (IN THE DIRECTION HE PREDICTS) AND OFTEN “BUYS INSURANCE” IN CASE HE IS WRONG. AN INVESTOR THAT “TRADES” OPTIONS IS DOING JUST THAT, HE IS TRADING A CONTRACT THAT GRANTS THE OWNER THE RIGHT TO EXCERSIZE AN OPTION – BUY AND HOLD, BUY LONG CALLS AND PUTS

THE RENTER SEEKS TO LEVERAGE HIS MONEY FOR A (MONTHLY) PREMIUM BY RENTING OUT STOCKS HE OWNS OR IS WILLING TO OWN. SELL A NAKED PUT ON A “DESIREABLE” UNDERLYING UNTIL IT IS ASSIGNED TO YOU. SELL COVERED CALLS ON STOCKS ONCE PURCHASED.

THE INSURER DOES NOT SEEK TO OWN ANYTHING. THE INSURER SEEKS TO SELL SECURITY (TO INVESTORS AND RENTERS). – STRANGLES, IRON CONDORS, UNBALANCED IRON CONDORS, SPREAD TRADES, NAKED PUTS, NAKED CALLS. AN INSURER UNLIKE AN INVESTOR TRADING OPTION CONTRACTS DOES NOT ACTUALLY TRADE OPTIONS. HE TRADES OBLIGATIONS. THIS IS PERHAPS THE MOST IMPORTANT WAY TO EXAMINE OPTION CONTRACT TRADING BECAUSE AT THE END OF THE DAY ALL OPTIONS ARE NOTHING MORE OR LESS THAN INSURANCE CONTRACTS. ALL OPTIONS ARE “SOLD” INTO EXISTANCE BY PEOPLE WILLING TO MAKE A PROMISE (INSURE) THAT IF THIS SPECIFIC THING HAPPENS THEN I WILL DO THIS FOR YOU. AFTER THE OPTION (INSURANCE) CONTRACT IS CREATED IT CAN BE TRADED FREELY BEING BOUGHT AND SOLD AGAIN AND AGAIN FOR PROFIT OR LOSS OF INVESTORS BANKING ON DIRECTION BUT AT THERE VERY ROOT OPTION CONTRACTS AND OPTION TRADING IS AN INSURANCE BUSINESS. AND CAN AND POSSIBLY SHOULD BE HANDLED AS SUCH.

AGAIN, AT THEIR CORE INSURANCE COMPANIES SEEK TO SELL SECURITY. NO ONE DOES THIS OUT OF THE GOODNESS OF THEIR HEART. WE ARE ALL IN BUSINESS TO MAKE MONEY. THAT’S BUSINESS. IT’S NOT UNSCRUPULOUS. IT’S NOT UNFAIR. IT’S NOT DISHONEST. IN FACT, IF YOU WERE TO DRIVE YOUR INVESTMENTS OUT ON THE OPEN ROAD YOU WOULD BE REQUIRED BY LAW TO HAVE INSURANCE ON IT OF ONE FORM OR ANOTHER. SO IF THE GOAL OF INSURANCE COMPANIES (OPTION WRITERS) IS TO MAKE MONEY THEN THEIR ULTIMATE GOAL IS TO COLLECT MORE IN PREMIUMS (PROFIT) THAN THEY INTEND TO COVER IN CLAIMS (LOSSES). ALL THIS BEING SAID THERE IS ADDITIONAL VIRTUE IN TRADING OR INSURING INVESTMENTS ON THE MARKET. FIRST MONEY CAN BE MADE OR LOST IF AN UNDERLYING MOVES IN EITHER DIRECTION BUT NEVER BOTH AT THE SAME TIME. AS MENTIONED, INVESTORS MAKE MONEY BY LEVERAGING THEIR CAPITAL ON THE RIGHT SIDE OF THOSE DIRECTIONS AND OFTEN “BUYING” INSURANCE IN CASE THEY ARE WRONG. AGAIN INSURERS MAKE MONEY BY “SELLING SECURITY”. BECAUSE MONEY CAN BE MADE OR LOST IN EITHER DIRECTION BUT NEVER BOTH THEN WITH THE SAME AMOUNT OF CAPITAL YOU CAN COLLECT TWICE THE PREMIUM ON THE SAME UNDERLYING BY INSURING BOTH DIRECTIONS OF MOVEMENT BECAUSE BOTH SIDES CANNOT BE THREATENED AT THE SAME TIME. THIS IS DIFFERENT FROM OTHER INSURANCE BUSINESSES BECAUSE GENERALLY THEY ONLY COVER LOSS ON A DOWN SIDE EVENT (ACCIDENTS, FIRES, THEFT, ETC). ADDITIONALLY DUE TO THE NATURE OF OPTION CONTRACT LIQUIDITY OPTION WRITERS (INSURERS) CAN TRADE THEIR OBLIGATIONS FREELY SO LONG AS SOMEONE ELSE IS WILLING TO ASSUME IT. IN FACT THOUGH MOST SEEM NOT TO LOOK AT OPTION TRADING FROM THE STAND POINT OF THE INSURER AT ALL, EVEN IF YOU DO ENTER INTO YOUR TRADES WITH A MINDSET OF RUNNING AN INSURANCE BUSINESS IT IS QUITE LIKELY THAT WHEN YOU “WRITE A CONTRACT” YOU ARE INSTEAD SIMPLY ASSUMING AN OBLIGATION SOMEONE ELSE HAD PREVIOSLY GENERATED THAT THEY NO LONGER WISH TO CARRY. JUST LIKE WITH INVESTORS THESE TRANSFERS OF OBLIGATION CAN BE DONE FOR PROFIT OR LOSS. BUT WITH INSURERS THE OUTLOOK TO HAVE WITH THESE OUTCOMES ARE TRANSFERS OF OBLIGATIONS THAT END IN PROFIT ARE THE RESULT OF PREMIUM COLLECTED AND TRANSFERS OF OBLIGATIONS THAT END IN LOSS ARE THE RESULT OF COVERING A CLAIM.

THE BIGGESTS AND MOST SUCCESSFUL INSURNANCE COMPANIES IN THE WORLD MAINTAIN THEIR BUSINESS BY ESTABLISHING STATISTICS AND INSURING MOST DESIREABLE CANDIDATES ACCORDINGLY, LIMITING THE AMOUNT OF COVERAGE THEY ARE WILLING TO OFFER AND BY SELECTING CANDIDATES UNLIKELY TO FILE A CLAIM (EXCERSIZE THEIR CONTRACT).

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