35 lines
2.4 KiB
Plaintext
35 lines
2.4 KiB
Plaintext
214 • The Intelligent Option Investor
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from a portfolio of short puts with the yield I might generate from a cor -
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porate bond portfolio. With this consideration, and keeping in mind that
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these investments are unlevered, 2 the name of the game is to generate as
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high a percentage return as possible over the investing time horizon while
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minimizing the amount of real downside risk you are accepting.
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T enor Selection
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To maximize percentage return, in general, it is better to sell options with
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relatively short-term expirations (usually tenors of from three to nine
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months before expiration). This is just the other side of the coin of the
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rule to buy long-tenor options: the longer the time to expiration, the less
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time value there is on a per-day basis. The rule to sell shorter-tenor options
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implies that you will make a higher absolute return by chaining together
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two back-to-back 6-month short puts than you would by selling a single
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12-month option at the beginning of the period.
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During normal market conditions, selling shorter-tenor options is
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the best tactical choice, but during large market downdrafts, when there
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is terror in the marketplace and implied volatilities increase enormously
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for options on all companies, you might be able to make more by sell-
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ing a longer-tenor option than by chaining together a series of shorter-
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tenor ones (because, presumably, the implied volatilities of options will
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drop as the market stabilizes, and this drop means that you will make
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less money on subsequent put sales). At these times of extreme market
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stress, there are situations where you can find short-put opportunities
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on long-tenor options that defy economic logic and should be invested
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in opportunistically.
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For example, during the terrible market drops in 2009, I found a
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company whose slightly ITM put long-term equity anticipation securities
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(LEAPS) were trading at such a high price that the effective buy price of
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the stock was less than the amount of cash the firm had on its balance
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sheet. Obviously, for a firm producing positive cash flows, the stock should
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not trade at less than the value of cash presently on the balance sheet! I ef-
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fectively got the chance to buy a firm with $6 of cash on the balance sheet
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and the near certainty of generating about $2 more over the economic life
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of the options for $5.50. The opportunity to buy $6–$8 worth of cash for |