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+204  •   The Intelligent Option Investor
+Portfolio Management
+There is certainly no way around the tradeoff between OTM and ITM 
+risk—the rules of leverage are immutable whether in a bullish or a bear -
+ish investment—but there are some ways of framing the investment that 
+will allow intelligent investors to feel more comfortable with making 
+these types of bearish bets. First, I believe that losses associated with a 
+bearish position are treated differently within our own minds than those 
+associated with bullish positions. The reason for this might be the fact 
+that if you decide to proactively invest in the market, you must buy se-
+curities, but you need not sell shares short. The fact that you are losing 
+when you are engaged in an act that you perceive as unnecessary just 
+adds to a sense of regret and self-doubt that is necessarily part of the 
+investing process.
+In addition, investors seem to be able to accept underperform-
+ing bullish investments in a portfolio context (e.g., “XYZ is losing, but 
+it’s only 5 percent of my holdings, and the rest of my portfolio is up, so 
+it’s okay”) but look at underperforming bearish investments as if they 
+were the only investments they held (e.g., “I’m losing 5 percent on that 
+damned short. Why did I ever short that stock in the first place?”). In gen-
+eral, people have a hard time looking at investments in a portfolio con-
+text (I will discuss this more when I talk about hedging in Chapter 11),  
+but this problem seems to be orders of magnitude worse in the case of a 
+bearish position.
+My solution to this dilemma—perhaps not the best or most rational 
+from a performance standpoint but most manageable to me from a psy-
+chological one—is to buy OTM puts with much smaller position sizes than 
+I might for bullish bets with the same conviction level. This means that I 
+have smaller, more highly levered positions. The reason this works for me 
+is that once I spend the premium on the put option, I consider the money 
+gone—a sunk cost—and do not even bother to look at the mark-to-market 
+value of the option after that unless there is a large drop in the stock price. 
+Somehow this acknowledgment of a realized loss up front is easier to han-
+dle psychologically than watching my ITM put position suffer unrealized 
+losses of 1.5 times the rise of the stock every day.
+This strategy may well be proof that I simply am not a natural-born 
+short seller, and you are encouraged, now that you understand the issues