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Strategies & Market Trends : Selling Puts: Have Cash Will Travel
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To: David Lind who wrote (835)1/21/2000 2:18:00 PM
From: tyc:>  Read Replies (2) of 1235
 
< I haven't fully thought through repair in case of a
major correction, and I'd like some ideas.

What I am going to suggest will be unpopular, and people will say it is too risky. But keep in mind the situation you are talking about ( i.e that of a major correction)

The best tactic is to cover the short put by shorting the common. You are using the short stock to hedge your short put. As soon as the correction is over, you lift the hedge.

Morover the best time to place the hedge is EARLY in the correction. You could make more money on your hedge than you did on the short put.

For several weeks ( so you see I don't profess to be a veteran) I have been working with a short straddle on a very volatile stock... short puts and short calls at the same strike. It soon became obvious the while the put is in the money (or while the stock displays bearishness) the correct hedge is a short. When the market sentiment changes, I will change my supporting "hedge" position to LONG. I would not dream of playing with the straddle itself.... the generous time premium is too valuable.

Time will tell... but so far so good.

Let me make one more (perhaps obvious) point. A short put has the same profit profile as a covered call; one is just as risky as the other. THEREFORE a short straddle is tantamount to a RATIO WRITE; it has a terrific profit profile especially if you are prepared to leave it in the background and play the stock short and long to guarantee and extend the profit profile.
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