How Might Jesse Livermore Use Stock Options?

Discussion in 'Options' started by Jackpot, Dec 25, 2017.

  1. Jackpot


    Mr. Livermore says the big money is in the main move, not the fluctuations. He also says to have the patience to sit tight to capture the big move. However, with the usage of options, large amounts can be made from small fluctuations. But, due to theta, the time constraints will make sitting tight not as easy. A weekly+fluctuation can generate the equivalent of a monthly+medium move. Theoretically, a daytrader could use weeklys to compound to a greater extent, although trading size at some point would cause liquidity issues.
  2. MACD


    I do this every day. In my opinion your post is not quite on point -- but you bring up interesting points. It is all how you use the options as part of your strategy.
    Jackpot likes this.
  3. Jackpot


    An answer to a question someone asked on a different site:

    Leverage was an incredibly important aspect of Livermore's obscene success in trading. You ask how much leverage did he use. Before The Great Depression in October 1929, Livermore reportedly had $20 million liquid. He used his relatively illiquid assets (yacht, property) to collateralize against another $10 million. He put up $30 million as margin to short nearly $500 million in stock. Let's think about that for a minute. If the stocks he shorted went up just 3%, he'd lose half his net worth ($500,000,000 x 3% = $15,000,000). This is something he did THROUGHOUT his trading career - not just 1929.

    The reason he often lost so much after making so much is because he experienced these adverse price movements after betting a multiple of 10 - 20 times everything he had. If I had to guess, his leverage averaged out between 10x - 20x. I cannot fathom using this amount of leverage trading equities. Timing would have to be nearly perfect to avoid an extreme drawdown. The more leverage you use, the better timed your trades/investments need to be to avoid getting run over. It is incredibly challenging. A hundred years ago prices probably didn't flash higher or lower in milliseconds as they do today, which may have made the extreme leverage factor easier to implement, but still a major challenge.

    In a nutshell, Livermore nearly perfected the art of leverage in his time. Nearly.

    Leverage used before the crash that caused The Great Depression found in Pg 314 - 315 in The Man Who Sold America Short in 1929 by Tom Rubython
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  4. MACD


    Nice work Jackpot. Good followup post. Thanks. Yes, leverage is certainly can be either "good" or "bad" -- an excellent advantage or sometimes if not used correctly an account closing disaster. So key IMO is to understanding the proper application of options with the understanding of the risk parameters presented by the Greeks. Master with the risk metrics are telling you and then the appropriate use of options as a hedge will contribute substantially to success.
    spindr0 and Jackpot like this.
  5. zdreg


    if it is to be believed Livermore would have bought deep out of the money options, somewhat similar to LEAP options nowadays.
    Last edited: Dec 26, 2017
  6. Pekelo


    I disagree. He might have done that, but that isn't the best approach. After all he would have to guess correctly the raise and buy the calls below that. If you guess wrong, the stock might raise but if it doesn't hit your strike you still lose money.

    But if he sells vertical puts, just below the current price or even better away from it, he would have got a good return, time would work for him, and even if the stock doesn't raise at all he would make good ROI. Remember margin is low on verticals...
    zdreg likes this.
  7. Jackpot


    I wonder if he would have attempted to capture the main moves using weeklys via day trading. The compounding factor combined with extreme leverage would have multiplied the initial sum very quickly. It is certainly possible to anticipate breakouts and big movement days on various timescales (looking at BIDUs long term chart, it was a massive triangle in the making), but waiting for the market to 'confirm direction' for an entry point would help timing and avoid theta loss.
  8. Visaria


    Livermore used options on commodities such as coffee.

    I believe that if he were around now he would day trade extensively.
  9. That would be a Jackpot...Holy Grail scenario if one could successfully pull that off.