brian j "selling puts is like selling insurance"..perhaps
selling puts is a much maligned strategy due to lack of understanding of risk. the ability to control risk is gained through discipline and fundamental knowledge of the underlying company and the overall economy. mix in a feel for the psychology of the market and the risk is no greater and actually less then the decision to go long a stock at a point in time. the strategy works in bull and bear markets, and becomes temporarily disjointed in a rapidly falling issue. but unlike call or put buying, repair strategies exist which allow an increase in contract time and an addition of premium to do so.
visx, i'm not familiar with, but lu and dell are positions that have been very profitable, more so with the rapid declines which inflated the implied volatility.
case in point....2/17/99 dell first downgrade, stock drops presplit to 82.5, the premium on the zdemd (0120) swells to 52, giving at the moment an adjusted cost if assigned of 68. the stock continued over the next few weeks to decline to the 70(35post split) range, yet the premium never went above 52. yesterday the last trade on the post split zdeml(0160)was 21.5 with the common at 41.375......so let's compare the result of the apocalyptic event. (split adjusted)
2/17/99 dell common = 41.25 prem=26
2/23/99 dell common = 41.375 prem=21.5
the above was an example of a higher risk position, as the strike was far above the stock price. positions set with strikes at or below the stock price are very conservative, not just in my mind, but as stated by mcmillan, bittman, roth....and in fact "options" by the educational div of the cboe simply explains (page 102):
"the investor who stands ready to purchase the underlying security is not speculating. the investor has the capital necessary to establish a long position in the underlying security. the assignment making him long the stock may not be his goal, but it is not a cataclysm either."
consider again your falling knife scenario......this proves how fragile an otm call buying strategy is....
call buying is brilliant in up markets, selling of any contract works in all markets.....believe warren buffett once said (paraphrase) "i'd sell insurance in an accident ward.......if the premium was high enough!!!
in summary, risk is what you make it.......knowledge and experience negates speculative risk and establishes calculated risk........a risk that is inherent with any investment.
good luck...ed a. |
