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Strategies & Market Trends : Selling Puts: Have Cash Will Travel
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To: tyc:> who wrote (852)1/23/2000 3:38:00 AM
From: Greg Higgins  Read Replies (2) of 1235
 
wmchen writes: If my puts are in the money, AND the stock heads south, I will hedge the position by shorting common. Even if I short (successfully and profitably) only 100 shares, I know that my short-lived hedge has enhanced the profit profile of the entire position.

This is what I really want to talk about. Suppose you sell the 105 straddle and then wake up Tuesday to find that MSFT has dropped to 96. I agree that one course of action would be to short the stock. What I don't see is how you're going to make money off of it. The only way to cover the short at a profit is to buy the stock at a lower price than that at which you shorted, but if you do that, your short put is certainly going to be losing you money.

If you short and the stock turns around and suddenly opens up at 114, one possibility is to buy the stock and cover the naked call, but you still only break even or make a small profit based on your premiums from the short straddle, or possibly suffer a small loss. I don't see how you're making any additional profit.

To reiterate: as I see it, a naked straddle has a fixed profit potential - I fail to see how any tinkering can "enhance" this profit, I believe the best you can do is to limit your losses.

Perhaps you'd like to give us a concrete example to illustrate your point.
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