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Minyan Mailbag-Being Bearish


It ain't easy being me!


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Prof. Succo,

The bear side has been very, very difficult for me. So I guess I am not very comfortable shorting the stocks and waiting for them to come down. My trending systems of up market do not work for down markets with same expectancy.

However we all need some income. So I have been trying to formulate the options strategy as -

a) Going short in rally.

b) Then selling in the money puts on the same day.

Now this revolves around what to do when stock goes down or what
to do when it starts moving up and your put comes to expiry. What kind of things to look for (any pointers to books/sites/articles would be useful) in terms of risk management?

On paper it looks too simple, but I cannot foresee probably all the things that can go wrong with this one and how to manage risk with this strategy and take profits.

Your help is very much appreciated.


Minyan Suhas

Minyan Suhas,

If I have this right it seems you sell stock into a rally. Then you hope that the stock goes down and then sell an in the money put. In this way you hope to "leg" into a delta neutral trade of being short premium.

First of all, I see no advantage in trying to leg. You probably have as much chance as being wrong or right on the "leg" given that you plan to sell the put the same day. You also leave yourself exposed to the whims of the market makers "fading" on price if they know you must sell. They are experts at sniffing this out and will lean against your order until you cry.

Secondly, out of the money calls on stocks are for the most part pretty darn cheap. If out of the money calls are cheap, the in the money puts must also be cheap. Options of the same strike must have the same implied volatilities because of put call parity. Otherwise there would be free arbitrage opportunities.

So it seems to me you are taking unnecessary risk for a trade that is theoretically not attractive. Not advice--just tryin' to educate.


Professor Succo

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