Wednesday, January 25, 2006

A Simple Lession

At the risk of making this blog spell out the obvious I can't help but point out the irony in owning OEX 575 calls.

We own them from Friday's close where OEX was a bit below 572. With OEX going to the strike at this hour the calls are worth less than what we paid for them. Yes, vol crush, an excellent example of owning ATM options, being right on direction and still losing money!

This is why I personally don't like long "naked" premium. Want to play direction? Do stock. Forget deeps or OTM's - put your money where your mouth is and do stock.

That's why our short premium and our long/short stock positions are doing perfectly well and long premium is languishing. Nothing we didn't know but I thought I'd share this simple lesson. :)

At some point I'll write a piece on why my strategy is so short premium and so long stock (the latter- when appropriate). For now I'll just mention that there is a lot being said against options sellers because short premium means short vol/gamma - both extremely risky propositions. While I agree that this kind of risk can be fatal, it is how one approaches such risk on portfolio level that really matters. More on this later.

Cheers,
/Dmitry

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