Mike,
>>IMO, options are absolutely nothing about the price of the underlying
security (they are everything about correctly interpreting the
security's volatility differently than the market), and hence poor
substitutes to simple shorts, which for now I'm continuing to use.<<
I agree with your statement when you are taking about a single contract for 'x' time or when you are trading options. But what about the situation I am talking about? Suppose you view the option not as a single contract that will either be a winner or loser, but as a rolling LONG TERM short position. In other words,
1. I can choose to short stock 'abc' until the price reaches 'x'.
or
2. I can choose to sell calls on stock 'abc' every 'y' months until the price reaches 'x'.
It seems to me that if the stock is truly overvalued, a continuous series of selling calls could turn out to be more profitable because the calculation of the premium price is in part related to the stock price. And all option models I have seen assume that the stock is efficiently priced which in our example we are assuming is not the case. So I agree with you on a single option case or a trade, but I suspect my alternate view of a series could be different. If the stock goes down you can get the downward movement plus the premiums.
The option strategy limits losses when the stock is going up and against you and may even provide profits because of the continuous collection of premiums which can amount to a big percentage annualized.
It works out much better when the stock is sort of doing nothing but bouncing around for an extended period of time because you are collecting premiums.
The only down side, is when there is a sharp crack in the stock at one time or a crash. You may not participate fully in the profit. I suppose some judgment might be useful here as to why you are shorting the stock to begin with. Are you expecting them to miss the next quarter number? This could cause a violent move down. Then shorting would be preferable. But if you expect no violent move down other than random chance, if the stock moves down slowly, you can keep moving the strike price down and pretty much fully participate.
I have engaged in some hedging activities in my own portfolio over the last few years as the market moved higher and some of my personal holdings that I did not want to sell became overvalued. I sold calls on stocks I thought were more overvalued than my own and likely to disappoint. I am certain that in the cases where I have been wrong, the options strategy saved me a ton of money. Just something to toss around. Sorry I'm off the value investing topic.
Wayne |
