NaughtyPines

OPTIONS TIP: "CHEAP CALLS" HERE MAY NOT BE "SMART" ... DEPENDING

SP:SPX   Indeks S&P 500
Bad advice in part; good advice in part; hiding the ball in part. http://finance.yahoo.com/news/volati...213649448.html

The good part: cover your stock/equity positions with short calls. This will smooth out your P&L somewhat and protect you -- albeit not completely -- from down side risk while reducing cost basis in your shares. Unfortunately, they don't want to "share their secrets" right up front about "where" to sell those short calls (strike, expiry), so do some research as to where you should sell those (I generally sell the 20 delta short call to cover in the monthlies; others are slightly more aggressive and sell the 30; to a certain extent, it depends on what you're doing with an individual position (i.e., are you looking to reduce cost basis over the long-term or looking to get called away)).

(To be somewhat nit-picky here, though, selling short calls in this environment isn't quite as productive as in a high implied volatility environment. You'll get less than you would were implied volatility were higher. Nevertheless, staying "covered" the vast majority of the time is fairly good advice.)

The bad part, depending on what they're saying: buy calls here because they're "cheap." One of their recommendations is to liquidate a portion of your shares and buy long calls instead. As I've repeatedly said here, buying and holding shares is extremely capital intensive as compared to an options position that "synthetically" represents long stock. When I do a play like this article appears to be recommending (but doesn't come out and say directly), I buy deep in-the-money calls somewhat far out in time (>180 DTE             ). I buy deep and long-dated because I'm looking for calls with as little extrinsic value/premium in them as possible, because I just don't want to pay for premium in an option that will just decay over time. Even when I do this, I "cover" this "synthetic" long stock position with short calls nearer in time (the options lingo for this setup is a "Poor Man's Covered Call.").

If that's what they're recommending that people do here in this article, then come right out and say it, for goodness sake. Merely saying: "buy calls" is stupid, uninformative, and potentially destructive.

If the article is suggesting that readers buy out-of-the-money calls here just because they're "cheaper" (i.e., made up of less extrinsic value) than usual, well, that's just plain ass stupid advice. The vast majority of OTM calls expire worthless, so you would be throwing your money away on these if you do not get the required movement you need to "make them pay."

Long calls may be comparatively cheap here in this low volatility environment; it doesn't mean they're a "smart" play, depending what you're buying and where ... .
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