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Biotech / Medical : Biotech Valuation
CRSP 55.08-2.9%Dec 26 9:30 AM EST
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To: The Dodgy Ticker who wrote (8619)6/5/2003 3:09:44 PM
From: Biomaven  Read Replies (3) of 52153
 
selling stocks that have run up, and buying their calls in case there is more upside?

There is no free lunch. This strategy provides downside protection (the most you can lose is your call) and keeps upside, but the chances are you will lose the premium you pay. (Incidentally it is equivalent to keeping the stocks and buying puts). Notice also to maintain the same degree of "longness" you have to buy more calls than the shares you used to hold, because the call delta is always less than 1.

I kind of like the strategy I suggested during the bubble - setting a total dollar limit on your stock portfolio, and if your portfolio exceeds this amount sell enough stocks to bring it down below the cap. During the bubble I did this to some extent, but then unfortunately stopped doing it fully because I thought my tax bill was going to be excessive.

It's always a good idea to pretend your portfolio is cash and ask oneself whether you would invest it in a similar manner if you had to do it today. In the real world transaction costs and tax issues intrude, but it is still a very good discipline. It's all to easy to passively hold a stock as it runs to a ridiculous level at which you would never dream of buying it.

I'm not saying we are at bubble (or even near-bubble) levels yet, but it's good to think about this stuff ahead of time.

Peter
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