Add training workflow, datasets, and runbook
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192 • The Intelligent Option Investor
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In general, attempting to profit from potential mergers is dif-
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ficult using options because you have to get both the timing of the
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suspected transaction and the acquisition price correct. I will discuss
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a possible solution to this situation in the next section about picking
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strike prices.
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The second case in which it is not necessary to buy as long a tenor as
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possible is when you are trading in expectation of a particular company
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announcement. In general, this game of anticipating stock price move-
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ments is a hard one to win and one that value investors usually steer clear
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of, but if you are sure that some announcement scheduled for a particular
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day or week is likely to occur but do not want to make a long-term invest-
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ment on the company, you can buy a shorter-tenor option that obviously
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must include the anticipated announcement date. It is probably not a bad
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idea to build in a little cushion between your expiration and the anticipated
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date of the announcement because sometimes announcements are pushed
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back and rescheduled.
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Strike Price Selection
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From the discussion regarding leverage in the preceding section, it is
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clear that selecting strike prices has a lot to do with selecting what level
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of leverage you have on any given bet. Ultimately, then, strike selec-
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tion—the management of leverage, in other words—is intimately tied
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to your own risk profile and the degree to which you are risk averse or
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risk seeking.
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My approach, which I will talk more about in the following section
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on portfolio management, may be too conservative for others, but I put it
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forward as one alternative among many that I have found over time to be
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sensible. Any investment has risk to the extent that there is never perfect
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certainty regarding a company’s valuation. Some companies have a fairly
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tight valuation range—meaning that the confluence of their revenue stream,
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profit stream, and investment efficacy does not vary a great deal from best to
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worst case. Other companies’ valuation ranges are wide, with a few clumps
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of valuation scenarios far apart or with just one or two outlying valuation
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scenarios that, although not the most likely, are still materially probable.
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