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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: 249443 who wrote (14354)	4/20/2002 11:17:48 AM
From: MCsweet	Read Replies (1) \| Respond to of 78520

I've started taking a similar strategy. Don't recommend it for most people. It is selling naked out-of-the-money puts on stocks I wouldn't mind owning. If you check the vol quotes, you'll notice that out-of-the-money puts have higher implied vols than out-of-the-money calls. This means the premiums on puts are richer than on calls. This doesn't make sense to me from a statistical perspective as on-average stocks go up at more than risk free rate (used in Black-Scholes valuation), hence a naked call option should be undervalued versus a naked put option. It does make sense to me from an insurance perspective: Buying puts is like buying insurance for your portfolio, so you have to pay the insurance premium. With all that in mind, I prefer to sell out-of-the-money puts. I sell them for a stock I wouldn't mind owning at the strike price. Another nice thing about selling out-of-the-money puts is I can use a limit order and don't have track the order from second to second, as the value of the out-of-the-money puts is less sensitive to moves in the stock price then say an at-the-money option. Of course, it is best to diversify and take smaller positions on these things, as being short any naked option could cause a lot of pain. MC

To: 249443 who wrote (14354)	4/21/2002 5:23:02 PM
From: Allen Furlan	Read Replies (1) \| Respond to of 78520

mrjc,MCsw, mucho. Thanks for your posts. It would be interesting if some of the value players on this board would share their ideas on value from a hedging point of view. The following post shows how ciena could be two to four bagger over the next 21 months. Message 17319504 I have found some interesting ideas on the Mr. Pinks picks thread relative to over valued stocks. However I am not comfortable with the idea of shorting stocks, especially when the momentum players are involved in the action. Would like to find stocks that are just plain too high and which have way out of the money options. Although the idea of selling naked options is considered too risky by the "experts" I will repeat that one can hedge. Also the amount of capital involved is small so if one is careful the positions taken can be over many different issues in different sectors providing diversification. A comment on puts. They can be sold naked in an IRA if you use either cash or short term treasuries to back up the amount necessary from an assignment. Good luck to all.