When Buying Options Makes Sense
This week, I have been talking about using options as a value investor. Selling puts is most often the best options related tool for value types to use. It just makes sense to get paid to buy a stock at an attractive price and can add several percentage points over the year. Most of the time I want to be a seller of options not a buyer. Of course, there are always some exceptions to every rule, and today I want to talk about those. There are two occasions where I favor buying, rather than selling, options.
The first is when I want to short a stock. I have often said I am the world's biggest chicken short. Outright shorting a stock can tie up a lot of capital and you are subject to margin calls if the position moves against you -- as it usually does, in my case. Some of my options-savvy friends sell calls when they want to bet a stock will go down. Although that is a valid strategy, there have been many times when I needed more than one hand to count my associates who have been blown up by being short calls before a takeover or other significant event. That is just too much risk for me to take with my hard-earned money. So, over the years, I have developed my own chicken short style....565 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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