If I wasn't "buried" in my May 35's I might agree with you about the long term
aye, i hear you. the insidious thing about Mr. Market is that he will take away liquidity from the directional bettors just when they need it most. e.g., the value investors throwing in the towel and the shorts going bankrupt when the Nasdaq topped 5000. and more recently and close to home, QCOM investors getting blown out of their positions by margin calls when the stock went under 30.
so one objective i have is to maintain liquidity so that i can place some directional bets at "extremes". of course, one man's extreme at QCOM = 60 is another man's screaming short to 25, so part of the deal is that my directional bets cannot be too large (and hence the payoffs not too large, either, but hopefully enough to be worth the trouble).
one guy who has an interesting perspective on these things in Nassim Taleb, who recently penned Fooled by Randomness. and anybody who liked that book should check out the recent feature on Taleb in The New Yorker.
basically, Taleb's argument is the old "fat tails" argument; i.e., outliers occur in greater frequency than is predicted by Black Scholes (the options pricing formula). therefore, he buys outlier options (out of the money calls and puts).
the challenge of this approach is that, whereas somebody who sells the outliers makes money day in and day out (but eventually blows up on outlier days like 9/11); the party who buys the outliers loses money on a regular basis, but makes a ton of money on an infrequent basis. so Taleb must steel himself to lose money almost daily as his out of the money calls and puts expire worthless. the only way he can survive this "death by a thousand cuts" is to preserve enough liquidity so that, eventually, he will still be in the market on the day when another five-sigma event occurs (in a particular stock or the market as a whole). |
