Anyone buying Puts out there?
I am in the same boat as you. YHOO, AMZN, ATHM DELL and AOL are my stocks. I am not worried about ATHM (which will go up), DELL and AOL which will go nowhere special for a while but I am worried about AMZN and YHOO.
I have the same problem you do. I have to have some kind of puts or I just can't sleep at night. First I have to get my hands around where we are right now. My guess is that it is going like this:
AMZN knew they had a great growth (but not net) to report later this month so they split 3:1 early. This allowed people to run up the stock before their end of month report where they can do another 2:1 split. The idea is that if a split is announced at earnings, people are not as likely to sell off the stock immediately. They will at least wait until the split to sell. The idea is to keep throwing something out here to prevent a emotional stampede. The press has a huge investment in telling everyone things will crash.
YHOO probably does not have as great a report so they wait until earnings to announce a split. A 3:1 split announcement will keep the sellers down until the split date. The other strategy would be to do a 2:1 now and then announce another 2:1 just before split date. Or just do a 3:1 now and announce a 2:1 around the time the 3:1 takes place.
Absence the splits, this is generally the time of year where looking ahead we do not see a super strong time since we are dealing with advertisers and gift buyers. Their weak time is Q1. On the plus side this is the Internet it is still growing at a tremendous rate and increased volume of buyers might make up for the weak time of year. Also, who really wants to sell blue chip Internets? AMZN opened a 90,000+ warehouse in Washington, then a 200,000+ warehouse on the east coast and now is opening a 300,000+ warehouse in Nevada. All the right moves. Anyhow, I kind of agree with you that if there is a danger of sell offs it is a late January danger. The fresh money will already have been committed to the market and people like the broadbanders will be stealing most of the Internet headlines (T/TCI merger, a done deal, gets voted on in early Feb). T has already committed billions to upgrading TCI immediately.
IMHO It is important to realize that this is a whole new market and the average person-on-the-street is more in control of moving the market than the big MMs. E-trade and Schwab have proven this shift is real.
Usually, we have a big sell off before Christmas as MMs clean house and after Christmas we have some buy backs (thus the name: the Santa Clause effect.) as they get ready for the new year. In January it starts off slow for the first day or two and then gets hot by mid January as the MMs fill up their portfolios.
This year it was much more like a average investor controlling the market. Average people will buy right up until the last week of the year at which time they know what their taxes will be and then they sell off whatever fits their needs. January will find people with their year-end bonuses, etc. They do not have to go to some MM. They stick it right in the market. Hence an immediate spike in the buying of the blue chip Internets.
You may not agree with this but the profile of buying is now much more like a person than a MM. This also means that there may not be a enormous sell off with YHOO and AMZN getting cut in half. It also means that the market might get spooked easier too.
I agree with you that we should buy out of the money puts to cover our positions. The question is how many strike points out and when to buy.
Time to buy: The safest time to buy is probably tomorrow even though the stock will probably continue to go up until late Jan for the reasons above.
How far out to buy: The argument in favor of one month out is that it is cheap now and 2 or more months out it will become worthless quickly. The argument in favor of 2 or more months out is that if the stock goes flat for February-March you save a lot of money.
Someday I have to sit down with a spreadsheet and calculate this all out but, basically, if you buy close to the money puts frequently, you will kill all your profit. Consequently, you gotta buy out of the money puts and simply be willing to take the loss. Let's see $5 Feb 260. So 343-260 = a $83 drop. That's 24% of the value of your portfolio. That's a owwie. Another thing to consider is that if there is a split you should stock up on puts before the split because covering 3 times as much stock is more expensive (the option premiums do not respect scaling down too well).
What do you plan to do? |
