What would you do if a core holding eg. QCOM dropped in a correction by 40-50%
There are two components of one's portfolio: core holdings and options.
I. CORE HOLDINGS
Core holdings are LTB&H, I keep them through thick and thin. Most of them have appreciate significantly such that I don't even bother. Only when the fundamentals have changed do I reevaluate the position. Studies have showed that LTBH of good stocks is the best approach: as steady as a turtle and compared to the jumping rabbit. Therefore, even if the stock drops 50%, I will still keep.
II. Option:
All Options carry risks. Does not matter which type of option, short/long, put/call, straddle/strangle, spread bull/bear etc. The key is willingness to take loss, and what is the maximum amount. Be disciplined with that (easier said than done). Many of us (I am the among the worst) commit the worst crime: LYING TO OURSELF . We know that the loss should be taken, yet we keep fooling ourself by saying: "aah, it will come back" only to watch the stock keeps sliding. Therefore, some experts suggest the following approach in limiting the loss (naked put):
a. when the premium doubles the premium received cover the position
b. when the option becomes ITM, cover the position
The beauty of naked put is that when you cover the position, for whatever reason, you free the margin, so that you can roll it to further month with a different a strike price. (higher if you close it OTM, and lower if you suffer a loss).
When you sell naked put, and the market goes against you, you perform a repair strategy by rolling into later month with lower strike price. In this case, you collect additional premium to be used to close the original position. You can have positive cash flow, yet you are going into further month and lower strike price which means the new exposure is less vulnerable than the previous one. On top of that Uncle Sam allows you to deduct the loss of your original put option.
Summary: In rolling the option (repair startegy), you can thus have a tax writeoff while the cashflow is positive. Note that you don't have to roll it into the same stock. Maybe there is a new stock with better potential.
Hope that helps
Paul
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