I have to respectfully disagree. While your sceanario is correct, I work with a number of professional money managers who do buy puts in the situation I described. Concern on their part is (a) limiting losses after nice gains (b) buying the security of a certain portfolio return, at a specific moment in time, upon which their compensation is based. (c) leaving room for upside potential.
So, if in April one sells ATM May/30 calls and the stock goes up, oh -oh. Got to buy back the calls or lose the shares. Losing the shares results in realized gains..but loss of all upside potential above 30. Buying back the contracts can be expensive. If the stock goes down, I suffer market loss and get to pocket only the premium. On my trigger date (say, end of quarter) the value of my portfolio has a higher risk of being less than it would be under the following strategy.
Instead, if I want to ensure my portfolio locks in a quarterly return of, say, five percent, which guarantees my firm a management fee of xxxx, I can sell puts. the cost of the puts I immediately net against my gross return as of thata date to be sure my net return still hits the target for my fees. If the stock goes down, I am safe. If the stock goes up, well, I am safe again....and I more than offset the price of the purchased put with the unrealized gain in the shares.
The second situation better realizes the desire of certain investors to have at least a minimum market value on a given date. Because of SNDK's "odd" reaction to good earnings, buying puts could make sense....because maybe the earnings will be REALLY good and the stock would soar instead of tank. Second sceanario is a cheaper way to play that possibility, I think.
Both concepts work. Both have a place. |
