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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: LindyBill who wrote (2461)9/22/2001 12:58:17 AM
From: Mathemagician  Read Replies (1) of 5205
 
If I sell short at 28, and have a buy order in at 27.25, I don't think I can get hurt too much.

Ah, that was precisely my point. What determines how much you can get hurt is not where your upside exit point is, but where your downside exit point is combined with the likelihood of gaps. For example, you might short at 28 and then watch the QQQ rise (or gap) right up through 30, never to return. Your buy order at 27.25 will never be executed and you can be hurt very badly. Losses are not limited to capital invested.

If you are willing to place hard targets of a .75 gain and a .75 loss on each trade and are right exactly 50% of the time, you will lose money over time. Keep in mind also that the long term trend of the markets is up, which works against you when shorting (i.e. all else being equal you will likely be wrong more than 50% of the time).

When going long, taking advantage of the long-term upward bias of the market is called LTBH. There is no such thing as LTSH.

M

P.S. Simply deciding a priori to accept a .25 loss vs. a .75 gain does not work. All else being equal, your odds of being right adjust themselves accordingly and cancel out the enhanced risk/reward ratio. The "art" to trading lies in correctly identifying the situations where all else is not equal and then applying principles of prudent capital management.
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