You can learn from this analysis that from 1920 to the present day , you can make about 12% annual return on your investment on the basis of selling rates of the stock. But what about dividend ? We do not even know if the study covered rights issues ? Otherwise we can simply learn a scientifically ascertained fact that the portfolio must be diversified. If not it can be sure failure !! There are many school of thought for and against portfolio diversification. Warren Buffet the world's richest man do not diverfify his portfolio for the sake of diversification !! But Peter Lynch of Megallan Fund increased the portfolio from 50 to 150 the moment he took over the fund. But study from 1920 now makes it clear that diversifying the portfolio is sure way to success over longer time period in stocks. Buffet can be easily considered as an exception rather a general rule. Invest in stocks in small amounts first and buy more later on. 100 year time period research( in USA ) found that didvidend and NOT the share price bring real benefit to the investors over long periods!!!
This happened because the prices of the Puts being quoted in the market were way too high from that predicted by the Options pricing tools, even assuming that there would a fall in the market, and so naturally, as the expiry approached, even though the market crashed, the prices of the Puts came down to the values they should really have been. In the process I made profits.
Initially, in the weeks before the crash, I was shorting Puts and was making money, as the market went further up and the price of Puts fell. So people were telling me that I was making money not because of my skills but because I was simply being too lucky that the market was still going up when everyone else were expecting it to fall. I kept telling them that it was not so, I kept telling them that I would come out making money in the end even if the market was to crash. But nobody believed me. They didn't believe me because they are ignorant; they are actually fools who don't understand the mathematics involved. And in the Options market, it is mathematics and only mathematics that rules.
So even after the market has crashed I came out laughing making huge money!
How many times I have tried to drill it down in the thick skulls of other people, that, boss, Options trading is not about being Bulls or Bears, its about using mathematical tools. People disbelieved me. They lost money, I made money.
When I was shorting Puts, although on the face of it, it appeared that I was being bullish and was taking a position/view that the market would go even further up, in actual effect, I was not taking any view on the direction of the market at all!!! I was neither being bullish nor bearish, I wasn't betting at all. I was simply taking advantage of the fact that there are lots of idiots out there in the Options market who don't know a thing about how to price options and were sitting there for people like me to make money out of their ignorance/foolishness/stupidity. These people, as they really don't understand how Options operate were quoting stupidly high prices, prices that were just too high to be correct, so I simply sold the Put options to them at those high prices and made money as the prices of the Puts came down. Note that the prices of the Puts came down even though the market had gown down from 4600 to 4400. Didn't someone say that price of Puts go up as the market goes down. So why did this happen?
Now in those weeks the market kept moving up even though everyone was expecting it to go down any day. In precisely those very days, I kept making money by shorting Put options on the market Index.
As we know the price of a Put option on the market index will go up if the market index goes down, so, why was I shorting Puts when everyone was expecting a market crash?
Well its true that the price of Puts is inversely related to the price of the underlying - price of a Put option increases as the underlying falls and vice-versa. So was I shorting the Puts because, even though everyone else out there was expecting the market to crash, I was betting that the market would rise even further, and thus push the price of the Puts to fall thereby generating profits for me? In short, was I being a Super Bull? Was I being a Mad Bull?
The answer is NO! An emphatic NO.
I was doing so because the mathematical tool I was using was telling me to do so. And it was right. I made money even though the market turned upside down, which in ordinary situations would lead to huge losses for anyone shorting Puts. So what was it that was happening here?
Well the mathematical tool I was using to value the Puts was telling me that the value of Puts in the market was too much over-priced, so that even if a market crash came, I still could come out making money if I shorted those over-priced Puts.
That%u2019s what I did. And I made money. In effect, I trusted my maths, I made money.
