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FastLearner
Fury Holdings
Brutally Clever Empire
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Posted - 2007.09.25 18:57:00 -
[1]
 Originally by: Shadarle
Is this the reason most are investing? The 75% number? I'm curious as I still am curious what the point is instead of just buying/selling minerals on the open market. Even if I wasn't an investor I don't see why I'd use this... I'd love to have someone explain the benefits of this system to me.
The benefits vary depending on which end of the action you're on.
If you're a manufacturer - and think the price of Trit is going to rise - you can buy options to guarantee you can get your Trit in a few months time at a maximum of a certain price. Similarly if you're a mining corporation you can guarantee you'll get sales at a certain price in a few months time.
If you write options then potentially you can play both sides off against the middle and make a much greater return on your ISK than if you had to actually buy/sell the minerals.
But all of that depends on a collateral system which doesn't involve tieing up anything like 100% of the minerals in advance - otherwise writing options isn't profitable.
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FastLearner
Fury Holdings
Brutally Clever Empire
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Posted - 2007.09.25 19:35:00 -
[2]
Originally by: Shadarle
Originally by: Professor Bunsen
Originally by: Shadarle
Originally by: Ionia
Professor, why are you going with this model of mineral trading rather than buying/selling on the open market?
Ditto.
2 reasons. First is gearing, there's a lot more movement on an option if you make the right predictions than with minerals directly. 10% on a mineral may give 50% on an option. Secondly I like the idea of developing futures market and enjoyed doing the back end programming to create that.
I'm sorry... can you repeat that in English please? I understand you understand futures and such quite well... but can you explain the benefits to someone who has no clue what the terms you're using mean.
Such as "gearing", "options", etc.
Explain the 10% on a mineral may give 50% on an option comment as I have absolutely 0 clue what you're talking about.
The 10% on a mineral may give 50% on an option is pretty much what the "gearing" is. I'll pick totally hypothetical values to try to illustrate the point.
Let's say trit is at 2.5 and you correctly predict it's going to hit 3.0 in a certain time-scale.
With buying actual minerals you have to invest 2.5 ISK per unit of trit - meaning that IF you're right, you've invested 2.5 ISK for every 0.5 ISK profit you stand to make if you're correct. So if everything gos to plan you make a 20% profit on your investment.
With options you'd buy call orders (the right to buy trit) at 2.5. These may cost you, say 0.2 ISK per unit. On the face of it you may think you're worse off doing this - after all, you're only standing to make 0.3 ISK per unit of trit, rather than the 0.5 you'd make buying the Trit directly. But the opposite is in fact true - as you're only investing 0.2 ISK for every 0.3 ISK profit you stand to make if you're correct. So if everything gos to plan you make a 150% profit on your investment.
It's that ability to focus your ISK on the margins of the mineral price, without having to tie cash up in the actual mineral itself, which makes for potentially much larger profits from dealing in options rather than in actual minerals.
Of course the potential losses if you get it wrong are also much higher. And, until the collateral issue is sorted, there's little to no benefit in writing options - but plenty in buying them.
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FastLearner
Fury Holdings
Brutally Clever Empire
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Posted - 2007.09.25 19:43:00 -
[3]
Edited by: FastLearner on 25/09/2007 19:44:10
Originally by: Shadarle
Ok. So if you can do collateral free options on both sides then obviously you'll make money... either you can sell higher than you should or you can buy cheaper than you should... or you can choose to do neither. Great for the the person doing this. But how in the heck does the business profit off this? The way I'm understanding this is that the business is going to be doing this buying/selling from them? Sounds like they'd just be losing a lot of money. Or if it instead other traders buying/selling then why would they do this at an obvious loss?
And then, lets say there is a collateral... as you say it is not profitable, thus what is the point?
I don't understand how this works well for all sides. I either can understand why someone would partake in this or I can understand why the business would make a lot of money... but they don't seem to be able to both be true.
Can I get some more clarification/examples of how this is supposed to work so I can understand why I will personally invest and then also why the company wants me to invest... and finally, who it is exactly that has the minerals I would be buying or who would be buying my minerals.
Ignoring the collateral issue (for now) it works perfectly well for both sides. The IPO would make money off of two sets of customers:
1. Ones who want to "hedge" to ensure price stability. i.e. they buy options which both they AND the company believe will never be exercised - so that they have an absolute guarantee of sales/purchases at a future date. The expectation of both parties in these transactions would be no exercising of the options - and the options would typically be cheap ones.
2. People who believe they can predict mineral price trends better than Bunsen can. If he believes Trit price will fall then he'll write Call options on it. People who believe the price will rise will then buy those options. The IPO makes a profit/loss based on whether Bunsen is better or worse at predicting mineral price trends than those buying the options he writes.
There are also tactics available to reduce exposure and to minimise your losses when you realise you've written options which are likely to be exercised.
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