Michael, following up on Sanjay's question on thirds ... I got a vivid demonstration of one basic reason when RMBS moon-rocketed last month, just after I'd bought a first third of puts, and I only lost a third of what I would have otherwise. This would obviously apply in reverse, in the sense that at least you'd be 'in' in the case of a sudden plunge ...
But in more normal circumstances, how do you decide on second (and third) thirds? For instance with puts, if the stock price stays flat, do you buy a second third closer to expiry, thus saving some time premium? If the stock moves up, do you buy a second third at a correspondingly higher strike? If the stock moves down, do you buy at a correspondingly lower strike, or do you pay more for the same strike price? Or is it all just a matter of gut feeling? <g> |
