33 lines
1.5 KiB
Plaintext
33 lines
1.5 KiB
Plaintext
218 • The Intelligent Option Investor
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investment will be expiring just about the time another short-put invest-
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ment is becoming attractive, so you can use the margin that has until re-
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cently been used to support the first position to support the new one.
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Obviously, this strategy only works when markets are generally trend-
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ing upward or at least sideways over the investment horizon of your short
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puts. If the market is falling, short-put positions expire ITM, so you are left
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with a position in the underlying stocks. For an option trader (i.e., a short-
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term speculator), being put a stock is a nightmare because he or she has
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no concept of the underlying value of the firm. However, for an intelligent
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option investor, being put a stock simply means the opportunity to receive
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a dividend and enjoy capital appreciation in a strong stock with very little
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downside valuation risk.
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The biggest problem arises when an investor sells a put and then re-
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vises down his or her lowest-case valuation scenario at a later time. For in-
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stance, the preceding diagram shows a worst-case scenario of $55 per share.
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What if new material information became known to you that changed your
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lower valuation range to $45 per share just as the market price for the stock
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dropped, as in the following diagram?
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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 EBP = $47.50
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Overvaluation of
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downside exposure
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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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RED |