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Non-Tech : Paired Trades and Hedging Strategies
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To: Biomaven who wrote (37)12/3/2004 7:06:19 AM
From: Sam Citron  Read Replies (1) of 136
 
you are capped on the upside but are still exposed on the downside

Yes, of course. The methodology I have proposed seeks to answer the question of whether I ought to sell CCs on stock positions I already own and am not willing to sell (except at strike plus premium for the duration of the option). Since I already own the stock, I have accepted the downside risk. If anything, the call write can be seen as lowering this downside risk by effectively lowering my basis by the amount of the premium.

I am not (at least not yet) using this method to determine whether to enter an new position in a different underlying stock.

Whether or not you are being fairly rewarded for this depends on what the implied volatility of the option you are selling is.

I recognize that the potential reward and risk are embodied in the IV. Theoretically it would be possible to simply scan for the highest IV options in the universe, study up on the special situations and place a diversified set of bets. However, I am not yet ready for such a bold approach. So I start instead by limiting the universe to the set of stocks that I already own, and which hopefully I have already invested enough study to be comfortable with the downside risk. This is a much more comfortable rock on which to stand while I climb the learning curve and maximize my income by monetizing the volatility built into my portfolio.

Sam
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