IMHO, when one buys puts, they are trading the so called unlimited risk of a stock increasing to infinity with the wasting asset of a time premium.
Strictly speaking you are correct, the time premium is less risky because it can be quantified and one knows going in what the maximum liability is. In practice, one is betting on the timing as much or more than the magnitude and direction. Given that the majority of options expire worthless, this would seem to indicate buying puts have a less chance of being in the money come expirery.
In my experience, I have not made money on every stock I shorted. If I held every stock I have shorted long enough(an extra 3-6 months), I would have made money on every stock I have shorted. This, to me, is very telling. It says I need to be richer so as to be able to carry more margin so as to be able to wait for the inevitable drop, AND I can't time drops to save my life.
Though I cannot extrapolate myself to the entire investing universe, I do believe for the large majority of the investing public, this is also the case. (They cannot consistently time market movements.)
I would appreciate any feedback, as I realize this is just my opinion and in addition with $0.50 could buy a cup of coffee, except in NY where one would need $2.50.<ggg> Even more so, if I am crazed out of my mind and see the world in some skewed Picassian manner, please feel free to correct.
-Allan |
