Gary:
I frequently play in the options market, particularly on technology stocks. I was a derivatives trader for Goldman Sachs in the past, so I know a little bit about options. At times, particularly on high volatility stocks, they are an effective way to go synthetically long or short.
By selling call options, I am synthetically short AOL. Like everyone else, I was early to the game. But the rich value of AOL's time at least cushions some of the blow. By trading off some of my upside for out of the money strikes, I at least got a head start on the pack.
However, BY NO MEANS attempt to cover yourself by selling AOL puts. In essence, you will be selling off most your upside for a little bit of money today, and still hold all the risk.
If the stock rallies, as it continues to do, you will lose by being short. If the stock crashes hard, as most of us expect at some point, you will be left buying at higher prices. The risk/reward ratio is not in your favor, no matter how compelling the time value seems.
If you feel compelled to protect yourself against a further rally, buy some of your stock back. Or buy all of it back and sell call options against the stock to collect the time. But DO NOT SELL PUTS.
Regards,
Jason Cogan |
