/1 on the advantages of replacing high leverage margin swap/futures positions with options

On this auspicious day of #GuruPurnima, happy to share an easy to read and an exceptionally worthwhile investment. I plan to make a thread that will hopefully help us invest and live better. Thank you @awealthofcs 🙏🏻

Experience has taught me that less is always more when making investment decisions. Simplicity trumps complexity. Conventional gives you much better odds than exotic. A long-term process is more important than short-term outcomes.

And perspective goes much further than tactics. Tactics are useless to investors in a matter of days—sometimes in a matter of hours. But perspective is something that stays with the investor for a lifetime. It allows you to adapt to the changing market and economic landscape.

While keeping it simple won’t make it any easier to predict the future—no one has a crystal ball—it can give you the necessary capacity to make rational decisions, no matter what happens next.

Perspective is so important because, without it, even the most intelligent of investors can be ruined from a lack of self-awareness in their own abilities. Investors that fail to put the news or market moves into the proper context....[1/2]

Circle of Competence 101

Warren Buffett and Charlie Munger often reference the importance of knowing the boundaries of your circle of competence.

But what is a Circle of Competence and how does it work?

Here's Circle of Competence 101!

1/ First, a few definitions.

A Circle of Competence is the set of topic areas that align with a person's expertise.

If the entire world of information were to be expressed in a circle, an individual's Circle of Competence is the small sub-circle that represents their expertise.

2/ The idea surfaced in the 1996 BH annual letter.

"You don’t have to be an expert on every company...you only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital."

3/ A Circle of Competence is built over time.

It is built through experience, reading, dedicated study, and effort.

It is dynamic, not static.

It can expand as you deepen your knowledge in new areas. It can contract if you fail to nurture your existing areas of expertise.

4/ To engage this mental model in your life, there are two key processes to go through:

(1) Identify what falls within your circle
(2) Identify the boundaries of your circle

(1) is all about figuring out what you know, while (2) is about humbly admitting what you don’t.

Thread: Parabolic SAR Indicator

Parabolic SAR (PSAR) indicator was developed by J. Welles Wilder.

#PSAR #Indicators #Definedge

The calculation of this indicator is a bit complex, but the concept is extremely useful. I will try to simplify it and explain the logic. I will briefly explain the concept, calculation and reading.

Let us think about creating an indicator that shows the trend.

Using the indicator, we can identify & ride the trend using the trailing stop-loss method.

For trailing the stop in uptrend, indicator needs to be placed below the candle. Similarly, it should be placed above the candle for trailing in a downtrend. We will plot it using ‘dots’.

So, the indicator & stop-loss will be rising in uptrend & falling in downtrend.

Let us define the trend as:

If Low of the candle > Stop-loss level in bull market = Trend remains bullish.

If High of the candle < Stop-loss level in bear market = Trend is bearish

Imagine you are driving a car on highway; you would like to accelerate if the road is clear. You will slow down if the road is bumpy.

Price + Open Interest (OI) + Volume = Deadly Combo

There are many tools for Open Interest. Options Decoder from @TrueData2 is one of the simple yet powerful tools on options and OI.

Below are the 10 Powerful Features of Options Decoder

Thread 🧵🧵

(1/N)

#1 - PE CE Difference

This feature combines the OI of call options and put options and plots against each other.

At one glance, we can know what big players are doing!

(If they are selling more CE means, they are bearish on the underlying instrument)

(2/N)

#2 - Advance/Decline

This feature displays all the F&O stocks in one place.

In one click, we can see the stocks in any order (like an increase in price, increase in OI, or decrease in volume, etc).

A highly useful feature for options traders!

(3/N)

#3 - Open High

This feature displays all the strike prices that have an open high (or open low) for the selected instrument.

If many CE strikes show "Open Low", then the market is bullish!

(4/N)

#4 - IV Price-OI Chart

This feature plots CE and PE vs. Open Interest (OI) for the ATM strike price.

Always Remember:

CE Long Build Up + PE Short Build Up = BULLISH

PE Long Build Up + CE Short Build Up = BEARISH

CE Short Build Up + PE Short Build Up = SIDEWAYS

(5/N)