Cutting Through the Frustration

The frustration is thick enough to cut with a knife. Just when we seemed ready for the correction many wanted, equities bounced higher again. Although I am not entering new short positions, I continue to trim or re-examine my holdings. I am still tepid, but for those looking to limit risk and maintain long exposure, a stock replacement strategy could certainly be used, especially on non-dividend or high-volatility names.

My preferred approach is to buy an option with some time, either a March 15 expiration, which isn't much time really, or the April expiration and look for a delta around 0.70 or higher. There are two issues to note. First, this option is going to have a time decay risk associated with it. Part of the premium will be made up of time value, so this part of the premium will be lost day by day as we move closer to expiration. Second, there is still a decent-sized premium in relationship to the price of a stock if I am buying a delta of 0.70 or higher, especially on volatile names....319 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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