A couple of comments here about protecting gains from earnings surprises and option valuations:
1) Right where JDSU is now (at 224), yesterday, I bought the FEB 200 puts for protection. They were 14 3/8 when I bought. Volatility was high and so was the price, but I wanted the protection.
2) Today, and after the BIG event, those same puts are 11.5 with the stock at the same price, 224. That volatility, for those bold enough to sell it, is nice income. In this case, I wanted to be safe, but I paid for that priviledge. The loss is easily made up on the upside for the stock since I didn't buy puts at 1 for 1, I bought puts at .5 to 1.
3) Buying puts is a much more reasonable way to protect your gains or put your fear to rest than selling ST or even LT stock holdings because you're concerned about the earnings event.
Think of it as insurance. You do protective things to your house for a hurricane, so why not do protective things to your stocks for just such an event? However, unlike buying insurance on your house for a flood or other catastrophic failure, you can sell your puts after the event is over and still keep most of the principal.
In some cases, you may even make money on the puts for the ST (if the stock tanks....), while still holding your stock LT, so it can recover and move back up over time. In this way, you could win twice: ST gains, and eventually LT continued appreciation and gains.
Some folks who blew out wads of JDSU stock thinking it would follow QCOM and other down the tubes even with good earnings might want to consider a less black and white strategy than selling and then re-buying the common stock.
JMHO.
Steve |
