33 lines
1.4 KiB
Plaintext
33 lines
1.4 KiB
Plaintext
Accepting Exposure • 217
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Now a diagram when implied volatility is higher:
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RED
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Advanced Building Corp. (ABC)
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80
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70
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60
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50
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40
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30
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20
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5/18/2012 5/20/2013 249 499 749 999
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Date/Day Count
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Stock Price
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Obviously, there is much more of the put option’s range of exposure
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bounded by the BSM cone in the second, high-volatility scenario, and this
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means that the price received for accepting the same downside risk will be
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substantially higher when implied volatility is elevated.
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The key to setting up a successful allocation of short puts is to find
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companies that have relatively low downside valuation risk but that also
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have a significant amount of perceived price risk (as seen by the market)—
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even if this risk is only temporary in nature. Quarterly earnings seasons are
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nearly custom made for this purpose. Sell-side analysts (and the market
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in general) mainly use multiples of reported earnings to generate a target
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price for a stock. As such, a small shortfall in reported earnings as a result
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of a transitory and/or nonmaterial accounting technicality can cause sell-
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side analysts and other market participants to bring down their short-term
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target price estimates sharply and can cause stock prices to drop sharply
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as well.
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5
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These times, when a high-quality company drops sharply as a re-
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sult of perceived risk by other investors, are a wonderful time to replen-
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ish a portfolio of short puts. If you time the tenors well, your short-put |