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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Frodo Baxter who wrote (6278)	9/9/1998 11:12:00 AM
From: Paul Berliner	Read Replies (1) \| Respond to of 9980

L.K./thread/simple equation..... I should've noted that that equation is my own - not from a textbook, though I knew many would disagree with it. I read something quite the contrary in the most recent issue of newsweek, where a writer composed a basic financial article suitable to newsweek's passive audience. His equation said that for every dollar lost in the market, the loser would cut personal spending by just 2.5 cents. That I don't buy. These equations are from outdated economic textbooks with crusty consumer spending models as the intricacy of the math. I like my equation better! It just makes more sense that if Mr. & Mrs. Doe's unrealized gains are trunkated by 20% that they'll certainly put off a major purchase - not just minor ones (2.5 cents/dollar). As for the options/leverage/churning , etc; Suppose I want to short Dell - 1,000 shares worth. My horizon being extremely ST (no more than 2 months) I would buy 10 in the money puts on Dell. Say Dell is at 60. I buy the 62.5 October puts. The premium should be up there because Dell is a volatile stock. Say the options are $6 each. The total purchase price is $6000. I start making money when Dell falls below 56.5. Why use options and pay such a fat premium? If I short Dell stock instead of buying puts, my risk is extraordinary. First, and worst of all, I have to cough up $30,000 to short Dell. Then, if Dell moves up on me alittle, the broker will call and ask for more margin. If Dell is upgraded by Merrill the next day and the market is also flying, I'm really in trouble. Dell jumps 10 points in 3 days and now I must deposit $5000 more in margin or cover the short. If I give up and cover at 70, I've lost 10,000. If such an event occurs when I use 10 puts instead of shorting, I can either cut my loss and sell back the puts or let 'em expire. Either way, my max loss is $6,000. Oh, and I'm not holding any current position in Dell (even though It may be prudent to by some out of the money puts should the Mad Hatter lose his mind and boot Dell out of Malaysia as an F--k You to the west). The chance of that happening is slim to none, though. In addition, the options on ADRs are usually fairly priced - The premiums are never huge like with Dell or Worldcom, so I feel that I'm cutting my risk rather than shorting the stocks themselves. I don't pay out much time value because I never trade unless I'm expecting results immediately. If I don't get 'em, I'm out faster than you can say "churn leveraged instruments". I believe you have to work on the sell side to be a churner - I don't. And if anyone thinks I've churned on this thread, please let me know. P.S. you'll all have a field day with my post above this one. Paul