Chris, First, at least half of my puts, and sometimes more than half, also expire worthless. That's why I don't take small profits unless expiration day approaches. The winners have to first cover the losers, and then crank out the returns. They do, but you have to be willing to watch a couple of doubles disappear. I think the roll down is the best cure for this problem. If you get a double, roll down, pocket the profit, and stay in the game. I prefer more than a double, a quadruple is my favorite roll target, but I definitely roll doubles and triples if expiration day is near or if I see a trading pattern that has taken hold, as with CDWC. When the pattern breaks, all the remaining roll downs could become highly profitable.
Identifying the catalyst is a difficult game, and an unnecessary one. All you have to know is that if stocks are overpriced, a catalyst will be found. For example, Merrill fell from $105 to $35 last year without a drop in revenues (one did occur, but the drop came much earlier). The world is filled with pitfalls and the perfect world is a fantasy that has held up the valuations of an ever shrinking number of stocks. Higher rates or tighter credit immediately destroy pe ratios, which is what happened last summer. Lower eps growth or even negative growth hit the stocks one at a time at first until the herd realizes that they are hearing too many of these sob stories. Rising oil prices have yet to work their way through all the economic ramifications. And should other markets get hot, who needs bloated US stocks? It hasn't been more than 5 years since Thai stocks carried higher pe ratios than US stocks.
MB |
