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  • who_is_your_pappy who_is_your_pappy Jan 25, 2005 1:55 PM Flag

    Problem with PUTS...

    The problem with selling short is unlimited downside risk. Smart options trading lets you avoid that -- but buying puts on a hugely volatile stock means paying an enormous premium, and, as you've noticed, relatively small reactions to price change until closer to options expiration (when guessing about directionality becomes a crap shoot). In essense, as stock price changes, premeium stays almost constant, and only a fraction of the total cost of the option responds to the price change.

    You're better off taking advantage of time decay when premiums are this high, which means writing rather than buying options. Be sure to hedge your bets by writing credit spreads. Or do a Yahoo Search :) for "short iron condor." The latter is basically a spread with a second spread built in for the sole purpose of lowering tbe cost of the transaction.

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