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Strategies & Market Trends : You buy a stock. It goes down, now what? -- Ignore unavailable to you. Want to Upgrade?

To: BWAC who wrote (9)7/7/1998 1:42:00 PM
From: Investor2  Respond to of 112
 
Re: "1. Sell the stock. Replace it with calls at a strike near the new much lower price."

It seems like you are mixing apples (stock) with oranges (calls). The only advantage of the above proposition (that I can think of) is that you're limiting your downside to the price of the call options. For instance, if the stock continues to drop a significant amount, you will loose the entire amount you invested in the calls, but no more. For this protection, you are paying the time premium of the call options. Why not just buy calls in the first place?

Best wishes,

I2



To: BWAC who wrote (9)7/7/1998 4:43:00 PM
From: VincentTH  Read Replies (1) | Respond to of 112
 
re: 1. Sell the stock. Replace it with calls at a strike near the new much lower price.

This is the strategy I use the most. However, it should also be
noted that in a taxable account, this results in a Wash Sale, i.e.
we can not claim the loss.

I like to sell 1/2 of my position, and use the $ to buy twice as much
calls, therefore, establish myself for a Recovery Spread for the run-up.


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