Paul, you wrote:
First, and worst of all, I have to cough up $30,000 to short Dell.
This is only a problem if you don't have it. If you are holding any securities in a margin account they will serve as ample collateral for the short. Additionally, if you have a good relationship with your brokerage firm, they will give you the majority of the interest on the whole $60,000. (Called a short-interest rebate) So while the option holder loses money unless the stock declines the savvy short seller is collecting interest. Time is against the option holder, yet it rewards the short seller.
If Dell is upgraded by Merrill the next day and the market is also flying, I'm really in trouble. Dell jumps 10 points in 3 days and now I must deposit $5000 more in margin or cover the short. If I give up and cover at 70, I've lost 10,000. If such an event occurs when I use 10 puts instead of shorting, I can either cut my loss and sell back the puts or let 'em expire. Either way, my max loss is $6,000.
Limited losses. That is the allure of the option. I say that options are for wimps. <g> If I am wrong, I deserve to lose money. Hedging against losses only hedges my gains if I am right.
-Robert
|
