36 lines
2.9 KiB
Plaintext
36 lines
2.9 KiB
Plaintext
934 Part VI: Measuring and Trading Volatility
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provides the stock/put holder with an additional alternative of choosing to extend his
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position for a longer period of time by buying another put or possibly by just contin
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uing to hold the stock after the original put expires.
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Many equivalent positions have similar characteristics. The straddle purchase
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and the reverse hedge (short stock and buy calls) have similar profit and loss poten
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tial when measured in dollars. Their percentage risks are substantially different, how
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ever. In fact, as was shown in Chapter 20, another strategy is equivalent to both of
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these-buying stock and buying several puts. That is, buying a straddle is equivalent
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to buying 100 shares of stock and simultaneously buying two puts. The "buy stock and
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puts" strategy has a larger initial dollar investment, but the percentage risk is small
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er and the stockholder will receive any dividends paid by the common stock.
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In summary, the investor must know two things well: the strategy that he is con
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templating using, and his own attitude toward risk and reward. His own attitude
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represents suitability, a topic that is discussed more fully in the following section.
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Every strategy has risk. It would not be proper for an investor to pursue the best
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strategy in the universe (such a strategy does not exist, of course) if the risks of that
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strategy violated the investor's own level of financial objectives or accepted investment
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methodology. On the other hand, it is also not sufficient for the investor to merely feel
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that a strategy is suitable for his investment objectives. Suppose an investor felt that
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the T-bill/option strategy was suitable for him because of the profit and risk levels.
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Even if he understands the philosophies of option purchasing, it would not be proper
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for him to utilize the strategy unless he also understands the mechanics of buying
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Treasury bills and, more important, the concept of annualized risk.
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WHAT IS BEST FOR ME MIGHT NOT BE BEST FOR YOU
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It is impossible to classify any one strategy as the best one. The conservative investor
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would certainly not want to be an outright buyer of options. For him, covered call
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writing might be the best strategy. Not only would it accomplish his financial aims
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moderate profit potential with reduced risk-but it would be much more appealing
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to him psychologically. The conservative investor normally understands and accepts
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the risks of stock ownership. It is only a small step from that understanding to the
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covered call writing strategy. The aggressive investor would most likely not consider
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covered call writing to be the best strategy, because he would consider the profit
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potential too small. He is willing to take larger risks for the opportunity to make larg
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er profits. Outright option purchases might suit him best, and he would accept, by
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his aggressive stature, that he could lose nearly all his money in a relatively short time |