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

To: Bob Rudd who wrote (5809)	1/19/1999 11:06:00 PM
From: Freedom Fighter	Respond to of 78490

>>Highfliers selling calls. The whole point of the operation is to fully participate in the downside collapse of wildly overvalued issue like AMZN. Selling calls exposes you to potential price explosion - AMZN moved about 100 points intraday in 5 sessions, without considering major expansion in risk premium 1 option would have exposed you to $10,000 drawdown, without giving you access to potential price IMPLOSION.<< I understand your point and I agree. I'm not sure what I would do with a stock like AMZN. Most likely I would start heavily in the money so I could participate in a collapse.(this one is wildly overvalued so definitely vulnerable) I would still collect a decent premium on the option sale because of the volatility. You have to remember that when the stock moved up 100 points, options sellers lost a lot less than short sellers because of the premium they banked. So short sellers lost 100 and options sellers lost 90 something or less. On the flip side, if the stock falls 100 (and you started 100 in the money) you can buy the first option back and sell another one that is 100 further in the money. You can keep rolling down the calls and get a lot of the collapse. How this nets out compared to the short seller depends on the timing of the events relative to expiration and the other usual factors. It will cost a lot to buy back that first option after the stock falls 100 points if you are still far from expiration, so the short seller usually will make out better. The sooner the collpase happens, the better off the short seller. The longer it takes the better off the options seller because he is constantly accumulating premiums. If it never happens, then the options seller is way better off. My big problem with the short side in general is that the losses are unlimited and the gains limited. The options route lessens the pain when you are wrong bigtime and still pays off when you are slightly wrong.