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Strategies & Market Trends : Value Investing
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To: Freedom Fighter who wrote (5805)1/19/1999 8:19:00 PM
From: Freedom Fighter  Read Replies (1) of 78495
 
Mike,

Here's a simple example of what I might do. Suppose I wanted to short the S&P500 because I thought it was worth 1000. Instead, I sell strike price 1000 calls going out 3 months and repeat the process every expiration. I might receive an annualized premium of anywhere from 7%-15% (probably closer to the lower) depending on where the S&P trades and what the volatility is. I will also bank the cash and earn interest.

If the S&P moves up 7%-8% this year I am still even to slightly ahead for the year and way ahead of a short seller.

If the S&P moves up a lot, I am losing but I am better off than the short seller.

If the market moves down but remains above 1000 I have made more than the short seller after 3 months (or 6, 9, or 12 months) because of premiums and interest.

If if moves close to 1000 at any point I can cash out the same as a short seller but I will have to give up some premium and he will not. Depending on how close to expiration I am and at what level the last option was sold at I may still be slightly better off or even with the short seller depending on how much I have accumulated in prior premiums and interest. It's a close call.

Only a crash through 1000 from a high level would leave me worse off.

If I felt something like that was more likely for whatever reason, I would reverse course and short instead. I am willing to give up the low probability crash scenario for the other favorable scenarios.

Wayne
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