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Technology Stocks : Internet Analysis - Discussion
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To: Steve Robinett who wrote (134)2/8/1999 12:05:00 PM
From: Joe E.  Read Replies (2) of 419
 
Risk and reward do not go hand in hand except in the low risk to the middle ground of the cash-bond-stock market. At the riskiest end, risk is underrewarded, because of a significant portion of the "investing" population who need what you guys are calling a "volatility fix." Usually the riskiest end of the equity market are the penny stocks, where the bid-ask spread is often 50% of the bid price. In the institutional world there are certain tranches of mortgage-backed debt that fulfill this role. Anybody can create this same risk-reward profile (high risk, low reward) by trading in short term well out of the money puts and calls, where again the bid-asked spread consumes most of the investment before the market movements are considered. Some people simply want the juice. If you find yourself needing this, I recommend buying one lottery ticket. That's what I do.

As to the risk of downward movements in stock price being the risk to be most importantly considered in analysis of internet stocks, why not use the implied volatility of LEAP puts at the asked price? This represents what the market is willing to pay to take the downside risk. (Yes, I know about put conversions, but that doesn't change the point IMO.)
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