The Long Strangle: What Options Traders and WoW Players Can Learn From Each Other

     At Columbia, I learned a bunch of fun and excitingly mathematical ways to evaluate companies and securities. In short, I learned an overview of the ways people with PhDs make money on Wall Street, and looking at the WoW markets, there are some interesting parallels to the superb traders. My favorite strategy I learned in school is a form of arbitrage, called the "Long Strangle," and hopefully, by the time I'm done explaining, you'll understand the concept of the trade. While you probably won't want to get out and execute one right then and there, hopefully I will have convinced you to sign in to World of Warcraft and "execute" on your warrior.

It's funny cause they sound the same.

     If at any point you want this post gets too Econ-y for you, feel free to read my Guide to Blackrock Caverns or Guide to Leveling Battle Pets for Profit. The first step in this is to understand what a Call Option is. Let's say everyone thinks Twitter stock is gonna stay at about $50 a share but you somehow know it'll go up to $100.  In essence, you pay $2.70/share in order to buy a option contract that gives you the right to sell 100 shares of Twitter next month at NEXT month's prices that you buy at THIS months prices. If prices go above $50, you can redeem/exercise your contract, and if they don't then you lost $270 bucks. If you hit your goal of $100 though, then you make $5000 minus your fees because 100 shares x $100 (final selling price) - 100 shares x $50 (initial purchase price).

No money, no money, no money, MONEY!

     So, this has risk involved, since you don't really know that Twitter is going to hit $100. or even stay above $50, where the call options become valuable as you see in the chart. What if you're "Bearish?" Then we use a Put Option. If you think Twitter is going to cease to exist in a month (lolz), then buy a Put at $50 for (it won't be the same price but it's usually close) $2.70. It does the opposite; it allows you to buy a share at next months prices at this months prices rather than sell them. So, everything is essentially the same, but you make money when prices go down. If Twitter went down to $20 dollars a share, in a month, we would exercise the option for 100 shares x $50 (initial purchase price) - 100 share x $20 (final selling price) = 3000. If the price went up, we'd lose our initial $270.

Money, money, money, No money....  :(

     Again, we got a lot of risk, and here's where I start to get excited (and where I start to peak my head into the World of Warcraft, almost there guys!) Y'all have heard about battle pet arbitrage? Well here's my favorite for of arbitrage IRL. When you combine these two and buy a call and a put at the same time, you have something called a straddle, which works ok; it pays off if the price moves but you lose a lot if the price doesn't. My favorite though is the "Long Strangle." Since options are markets too, what you do is search for under-priced calls and puts. So for instance, sometimes you'll find the aforementioned $2.70 at say $1.00. In the above examples, we bought both options at the same "strike price" of $50, but you can buy an option at any price you want to (The math changes, but I'll keep the example simple.) So, rather than buying both of them at $50, the you buy a Put at a higher one, of $80, and a Call at a lower price of $40. The two then add up to form a flat positive return (equal to how undervalued they were), and they give increasing returns beyond $40 and $80. Neat, huh?

...Money, Money, Money, Money, Money,...

     Just to be clear, the above graph is not realistic as the calls and puts pictured would have dramatically higher prices IRL, and thus much lower returns, but the shape and general idea is the same:

You are combining two otherwise risky techniques in order to provide security and make positive income no matter what you do.

     Now, if you were absolutely waiting for a form of arbitrage in Warcraft (that's not what I'm here to talk about) fine, here's a form or low-risk cross-market trading. Buy a battle pet that you get a really good deal on. Then, start a level one toon on another server (not a high population server as pet prices are low on those). Cage the pet and sell it there. Take your gold and buy as many other underpriced pets with your earnings as you can. Addons like TheUndermineJournal GE are great for giving tooltips for this. Sell the purchased pets on your home realm. If you started with a pet you bought for 3,000g and sold it for 4,000g. Then you bought four pets for 1,000g each and sold each of them for 1,500g on your home realm, then you started with 3,000g and finished with 6k. May take a couple days but really it's just logging in and out for a couple minutes.

BUT!

     That's not the point. What I wanted to say after explaining the long strangle, is that in WoW you should combine different techniques, professions, and strategies so that you're not only always making money, but so that you're risk of being broke and thus unable of making money in the future is reduced. We've all been inundated with ads showing how to get rich quick with penny stocks or how to win in the Forex or options markets. They'll show you the ins-and-outs of calls but buying them will always have risk. Similarly, if you focus on Jewelcrafting alone, you're at the mercy of your competitors. One person with too much time and gold on his hands (and a guild vault of gems) can come in and completely bottom out the market, and keep it that way for as long as he/she likes. If you don't believe me, go to Stormspire.net and read some of the horror stories. That's why I love both low-risk strategies (hard to go wrong with mining) and diversity of income sources.

     By low-risk strategies, I mean traditional profession crafting and posting. The simple professions crafts like current PvP crafted armor are a lot easier to price and sell than rare Burning Crusade gem cuts. For posting strategies, if someone posts a flask for 10g less than everyone else on Tuesday, I probably won't undercut them, and will instead post above them since my goods will sell anyways, but doing that increases the risk of not selling out my inventory, as does buying someone out. Higher-risk strategies that I avoid are things like market takeovers, where you control an entire market for an extended period of time. I also avoid large-scale resets in areas like gems, glyphs, (and now blacksmithing, cause that didn't end up going very well), because, like in options, while you stand to make a large profit if it all goes well, maneuvers like that carry needless risk if you can get rich either way.

My answer and recommendation to goldmakers is to use multiple progressive income streams.
1. Have your initial source of income be from professions. It's how the game is designed.
         How I recommend setting up TSM for professions
2. From there, you can branch out to farming your favorite dungeons and raids for battle pets and transmog.
         YouTube: 17,000 Gold Per Hour in Feralas?
3. Level an alt for more professions. You've got a stable income by now, so make the first part bigger by leveling an alchemist, tailor, engineer, or inscriptionist.
4. Find something fun you want to do and incorporate in. I like leveling and selling battle pets. You can be a master of halfhill though. Work around in the TCG market or play around with old crafts like Fortune Cards. Or do your research and become a master of the high-risk strategies that I so vehemently avoid so that you can implement them without as much risk. Fun little niche markets like this are great ways to keep learning and increasing your gold income while doing so.
        Easy Trick For 25% Experience Boost to Leveling Pets


I'm gonna leave it at that though. Thanks for reading my little WoW blog! You can find me on Twitter Here, and on YouTube Here. I strongly suggest you download the TradeSkillMaster addon and the UndermineJournal GE Addon. My brief setup guide is here, feel free to email or tweet any questions. And remember that the key to making gold in WoW is just to

Search. Craft. Post.
Every Day.

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*I don't own Twitter stock and am not promoting or bashing the company.
Also, for the love of Garrosh, this is not financial advice. I am sharing with you what I read in my textbooks to enlighten and entertain.