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> I think I understand what you mean. But still, if you sell 3 times as many
> contracts as you did in '98 you would still collect about 100 points. And
> your risk will be the same in points, or in a percentage of your trading
> capital !?
The risk will go up 3-fold if he sold 3x contracts.
The risk is linear to # contracts you're short, not the amount of $$ the
premium makes up as a % of your trading capital or of the strike price one
is short.
Joe's on the right track re volatility premiums not being where they were in
1998, except that the crash-type premiums exist on individual equities this
time around and not on individual indices.
Or - where they do on the indices, the fortunes sway swiftly. One has to
look at BKX premiums, SOX premiums, and compare them to NDX or SPX premiums
to understand why that happens.
A recent example is CSCO as it approached $50, the clear as day May 24
double bottom support level that correlated to Naz 3000.
The implied volatility has / had recently pushed up premiums on the then at
the money Nov 55 calls & Nov 55 puts that would bring you a 22% return on
your "investment" if the stock went out at the shorted 55 strike at
November's expiration.
Put another way, if CSCO moved up or down 22% from $55 from - oh - last week
to the 3rd Fri in Nov, you would need to "adjust" your strikes or your
position to NOT start losing money.
Was 22% good enough?
In Joe's example of 1998, 100 points was the 22% this year's CSCO got.
His risk, however, was not 100 points. It was the # contracts he had
shorted.
Same as this year, one's risk on CSCO is not 22% of $55. It is the #
contractrs short.
If one is short 10 puts and 10 calls. one would be obligated to pony up 1000
shares above $67 and be ready to buy 1000 shares below $43.
The fact that the $12,000 one collected as a result of shorting the 10 calls
+ 10 puts is irrelevant to risk measurement - the risk is that one may not
have the capital to buy & deliver 1,000 shares at $67 (or higher) against
the short calls, or buy and keep $43,000 worth of CSCO stock below $43 with
total downside exposure.
And the fact that "great companies have limited downside" is - finally - a
matter of history, as owners of Microsoft, Intel, Home Depot, Lucent, AT&T
etc have discovered.
The amount of 22% of $55 ($12) one would keep, if those 2 levels were not
triggered, would be a function of where in between the range of $43 and $67
CSCO went out on the 3rd Friday of Nov.
Until that happened, one would be carrying the risk of being long 1000
shares below $43 and short 1000 shares above $67.
> And what is the difference in volatility of the underlying index between
> '98 and now ?
Pull up a chart of VIX to get the general picture. The sector-specific
picture is different, though.
Gitanshu
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