Hi Anaxagoras,
Your CEPH strategy is quite correct, and quite astute. You explain it so well, too...very good post, you are an excellent teacher! I could never have explained it so well! When I have used this technique, it was also w/ the biotechs, particularly just prior to impending FDA approval, and not so much prior to earnings, though it works then, too.
If the stock tanks on unfavorable news, and one is fortunate enough to blow the long position at a minor loss (not always possible with a gap down opening), the short position will compensate for the long loss, and become a profitable position quickly on this sort of drastic news. However, if the opposite is true, and the stock opens and runs up unexpectedly as bad stocks often do (all stocks are bad, that is one of my tenets!), you can journal over your type 2 (or type 1) holding to type 3 to cover the short sale, but you lose out on any upward play on the long side. Obviously, if you are a bear, a shortie, that's not your interest I suppose, but this is why I think straddles or strangles are so effective in these scenarios. Naturally, though, I would not use this strategy longer term, but would close out the losing proposition immediately once the stock makes its definitive move.
I recognize that this is the shorting thread, not the options plays thread, but wanted to throw out this idea as an alternative to shorting against the box for those who play options and wish to take a position on a volatile move when precarious circumstances exist. I also find the fact that the loss is limited to the premium + commission on the losing proposition to be comforting, whereas a short gone bad can provide a pain that will definitely linger... :) Hard core gamblers may still choose the excitement of shorting against the box...but I doubt there are any here on this thread, right? <gggg>
Best wishes to you & happy trading!
Thanks for the great post,
Vicki |
