Thanks, Jill, you described much better than I did what I was trying to convey.
My comments on DIM options were only meant to say that there is risk involved in their use. If one is bullish, and correct, then DIMs provide wonderful returns without as much volatility as ATM or OTM. They move close to 1-1 with the stock, and yet give better returns. In that sense they are better investment vehicles for LTB&H. I used them myself when I was more bullish. All I was attempting to point out is that they do have a downside. If one is bullish and the stock turns violently against you, as happened with the Naz recently, in which many stocks took 50%+ haircuts, those DIMs may lose most if not all of their intrinsic value. If there is insufficient time to recover, the holder can lose it all. So in that way they have the same problem as a margin investment. It would not be fair, especially to newbies, to not point this out.
That in no way means that they should not be used, or that they are not a good investment vehicle. One just has to be very careful in their use. When I was more bullish, I used them to my advantage, particularly with QCOM. I used a stock replacement strategy but, in hindsight I should have closed out the DIM calls and moved into cash or common earlier. When the market started to slide, I closed them out (not nearly soon enough) and went to a combination of common, protective puts, and straddles. That gave me much more protection against the market slide than if I would have kept the calls, though perhaps with time I would have recovered and done even better. I have great admiration for those who truly are LTB&H, it is one thing to say it and another to do it. The key to that is L, buy them far enough out (eg leaps) that one can ride out at least a short bear market. Fancying myself close to early retirement makes me more protective of my holdings than I might otherwise be.
There are different environments for different strategies, and we need to be flexible. I am neither a permabull nor a permabear, though lately, as you noted, I have been more bearish than bullish. However, I have also been a good contrarian indicator, so perhaps the market will move up from here. I re-entered some long positions yesterday, though tentatively with tight stops. As you can see, we are down today <g> I have not checked, but I've probably been stopped out by now.
About my OTMs, I like them in an uncertain market because one can play with a smaller amount of money and, if lucky, can make large gains. If one is unlucky (as would be more likely), the loss is not that great. I would never recommend this strategy to anyone, but offered it in the spirit of sharing our individual thoughts on options. If I have a speculative investment which I fear others may follow me into without proper DD, I normally relay that in PMs rather than in public.
One other thing I think we have all learned from the recent slide is that there is no such thing as a safe stock, at least in the near term. Unless one truly has a 5+ year horizon, our investment strategies should incorporate exits and hedges for sudden downturns, even in a normal market. In this market, with the FOMC looming, with hedge funds playing their casino games, and with the momentum from day traders, extreme caution is advisable.
That having been said, and at the risk of sounding contradictory, I am bullish for the long term. I do believe that this bull market will continue for most of this decade, but we need to get through this year and the Fed's policies. It is not at all clear to me that AG can create another soft landing, and it is questionable how much of the first one was the Fed's doing, or how much long term harm has been created through near term manipulation of very powerful market forces. The Asian situation is far from stable, and their recovery is highly dependent on the trade imbalances which the Fed is fighting. Further hikes, especially if economic numbers continue to show strength, may bring an alredy unstable system down. And yet I have faith in the U.S. economic system, and even with a severe downturn, we will recover. That recovery would be led by the mass adoption of the technology that is still working its way out of G&K companies, and labs, and may be so vigorous that it may make the last run seem like child's play. The future still belongs to broadband data, communication, mobility, and convergence.
I may be all wet, and this is just my opinion.
P.S. And I need to be less verbose. |
