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Strategies & Market Trends : The Market Taught Me That......
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To: benmoti who wrote (86)11/9/1997 2:16:00 AM
From: Richard Babusek  Read Replies (1) of 151
 
Behrouz- You'r linking several things I said, that are seperate.

1. When I buy I know I can be wrong, so I usually have a stop to
force me out of a bad posision. I'll dicide where the stop is for each situation. The example of $8.5 was somewhere around what I actually
set. If I get stopped out and lose $2 it's on a stock I decided to
by when it was at $14 so that's a really long stretch from $14 to $5.
I'm not going to watch things deteriorate that far without doing something.

2. ECI at that time had a book value of ~$3. and increasing earnings, so if it goes to $1 I'll be buying with both hands!!

3. "What if" questions have to use quantities that you can attach probabilities to. I think that the situation that existed called for approx. 00.0001% probability of $5/share for ECI.

4. The Idea of writing another put is a seperate issue. We all want to discover hidden value, but sometimes it stays hidden longer than we want! Many times I've been correct but premature. It's easy to say I would have written more puts at $7.5-$5 (now that the stock is at $25)
but maybe I wouldn't have.

More to the point;
A) If I like a stock at $14 and I buy It, then it falls to $10 I'm out $4. On the other hand if I Get put at $12.5 after getting a $2 premium, and it goes to $10 I'm out $0.5.

B) For the case where you like a stock at $14 and order a buy at $12.50 (buying on the pull backs) but it runs up without pulling back, you'r out of the deal. But by writing a put you get to keep the premium.

So for any stock I like on the long side, I'll look at writing a put because (if the premium is adaquate), I'm better off if the price goes up, goes down, or stays put.

I don't try to guess where the market will be next week or month
so except for hedging I'm not interested in index options.

Ricardo
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