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