Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (67608)	9/13/1999 12:26:00 PM
From: Knighty Tin	Read Replies (2) \| Respond to of 132070

Mike, part Two. So, this strategy, known as naked straddle riding (the poster didn't mention holding enough cash to cover the purchase of stock put into his account, so he selling the put naked), is certainly dangerous. Essentially, you are risking huge to gain moderate. That is not my style. I believe that risk and reward should be at least equal and preferably with a huge margin toward the reward side. The poster probably thinks he has that edge because he likes Rambus, and he may have it, but if you really think that on a speculative trading sardine, this is a weak strategy to employ. Would it work on other stocks? Sometimes, yes. But the problem is, you'd better have about 3 winners for every loser, because when you lose, it will be a whopper. I have sold COVERED straddles in my income portfolios from time to time. Generally, they are on beaten down stocks of great cos., not on a speculative one-product co. selling at ridiculous price levels. For example, during the Billary Health Plan scare, I owned Pfizer and sold a straddle, holding cash for the put. I also held the stock in my cap app portfolio and was long shorter term, out of the money calls in the 90/10. But I hope nobody anywhere thinks that Rambus is as stable a company as Pfizer. So, my recommendation is that Leap Straddles (short puts) can be profitable. The best time to execute them is when the market is low, the industry you like is low and the stock you like is undervalued (Pfizer was at 13 times eps when I played my straddle). Don't do them on thin margin of $400, as the writer suggests, or you are very likely to be snuffed out by margin calls even when you are right. And be sure of the stock you are willing to play at extremely high risk. Another point: why mess with the stock and have a useless third leg? Buying stock and selling a call is basically shorting a put and holding cash. So, the author could accomplish the same think much cheaper, with less commissions, less friction and slightly less risk by selling one cash secured put and one naked put. Why did I use the stock in the straddle I mentioned? I had had it put into my portfolio from a previous credit bull spread. Otherwise, I would never do such an inefficient trade.