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Technology Stocks : America On-Line: will it survive ...?
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To: Investor-ex! who wrote (8063)2/21/1998 11:35:00 AM
From: Pancho Villa  Read Replies (1) of 13594
 
>>Have you considered a "covered" short sale? i.e., maybe short some shares and then sell some nice fat, near the money puts.<<

Interesting hedge. If the stock price keeps going up you just pocket the proceeds from the puts as these expire worthless. This limits somehow your risk on the upside If the stock tanks, you make money on your short when covering but give most of it up when closing the option's position. The limited reward in this scenario is that you pocket the proceeds from selling the puts.

The bottom line of the hedge is reduced risk on the upside and downside. Selling the puts once you are short, however, is an indirect way of covering your short position, recognizing [if you shorted at lower prices] that you made a mistake. Based on AOL's price volatility, the market, their fundamentals and the significant potential for bad news (from competitors' move. Read my previous post) my bet is that we will see much lower prices within the next 12 months, with perhaps a no so pleasant ride in between and the posibility that the ultimate realization that one has made a mistake shorting the stock which could result in a significant hit if the short position [as it is my case] is significant. I am short at appx
74+ 99+ and 110 [equal amounts]. What I may do is cover 1/3 of my short position somewhere in the 100 or under range [this assumes a finete probability of ever seen these prices. believe me, we will] and then sit on the smaller position and then repeat this procedure. Of course there is the possibility one may loose some money in all or some of the initial short position. Given the fact that AOL still has to prove they can generate [significant] advertising revenues and increase their margins I still find this a fair bet.

Pancho
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