25 lines
1.5 KiB
Plaintext
25 lines
1.5 KiB
Plaintext
263
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Chapter 12
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Risk and the intelligent
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OptiOn investOR
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The preceding 11 chapters have given you a great deal of information about
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the mechanics of option investing and stock valuation. In this last chapter,
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let’s look at a subject that I have mentioned throughout this book—risk—
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and see how an intelligent option investor conceives of it.
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There are many forms of risk—some of which we discussed earlier
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(e.g., the career risk of an investment business agent, solvency risk of a
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retiree looking to maintain a good quality of life, and liquidity risk of a
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parent needing to make a big payment for a child’s wedding). The two risks
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I discuss here are those that are most applicable to an owner of capital
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making potentially levered investments in complex, uncertain assets such
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as stocks. These two risks are market risk and valuation risk.
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Market Risk
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Market risk is unavoidable for anyone investing capital. Markets fluctuate, and
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in the short term, these fluctuations often have little to do with the long-term
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value of a given stock. Short term, it must be noted, is also relative. In words
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attributed to John Maynard Keynes, but which is more likely an anonymous
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aphorism, “The market can remain irrational longer than you can remain sol-
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vent. ” Indeed, it is this observation and my own painful experience of the truth
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of it that has brought me to my appreciation for in-the-money (ITM) options
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as a way to preserve my capital and cushion the blow of timing uncertainty.
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