>One only writes put when he thinks the bottom had been reached.
Well, not really.
One should write puts (or calls) when the volatility implied
by the option premium exceeds the projected future volatility
of the underlying stock, i.e. when the options are "expensive,"
which simply means the options price implies a greater move in
the stock than is *probably* indicated. Probably is a word an
a half, though, since no one really knows how stock prices are
distributed. Many popular option models assume a lognormal
distribution of stock price changes, i.e. ln( Pr_t+1/ Pr_t ),
but this is just a convenient assumption which is known to be
incomplete and imprecise. The distribution of stock prices,
unfortunately, lacks "stationarity," meaning that no known
probability distribution can decribe stock price changes with
any consistency.
Obviously, not everyone need bother with all the mathematical
mumbo-jumbo to trade options, but it really does help to use
even the simplest of models, e.g. Black/Scholes, to get a sense
of what volatility the option price is implying, compare it
to actual volatility and decide "cheap" (buy 'em) or "expensive"
(sell 'em). I do admit that I use puts as a proxy for short
sales, usually because my broker can never find shares of AOL
to short (but that's another story....)
Phil |
