Secret 34THE PUT ADVANTAGE
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When you buy options, you should always buy both puts and
calls. However, based on our research and track record over seventeen
years—even though we recommended the same number
of puts and calls for stocks—the put investments by far provided
the best return with the most home runs.
Therefore, I would bias my options portfolio with more puts
than calls. Puts provide more home runs for stocks, not only due
to surprise volatility, but also to the fact that when stocks fall,
panic can set in and enhance the decline. And, of course, there is
the institutional influence.
Many years ago Joe Granville and I were discussing our love
for put options, and he made a good analogy. When stocks rise in
price, it is like climbing the steps of the Empire State Building,
but when they fall, it is like jumping off the Empire State Building.
Stock prices fall much more sharply than they rise, and that
is what you are betting on—violent price action. Consequently,
puts give you more bang for your buck.
There is also another advantage; puts are usually cheaper
than calls. This is due to the fact that puts and calls are priced
based on the cost of holding the underlying position and a call is
a surrogate for the stock. Owning a stock is more expensive than
shorting a stock, the purpose of a put.
When you buy options, you should always buy both puts and
calls. However, based on our research and track record over seventeen
years—even though we recommended the same number
of puts and calls for stocks—the put investments by far provided
the best return with the most home runs.
Therefore, I would bias my options portfolio with more puts
than calls. Puts provide more home runs for stocks, not only due
to surprise volatility, but also to the fact that when stocks fall,
panic can set in and enhance the decline. And, of course, there is
the institutional influence.
Many years ago Joe Granville and I were discussing our love
for put options, and he made a good analogy. When stocks rise in
price, it is like climbing the steps of the Empire State Building,
but when they fall, it is like jumping off the Empire State Building.
Stock prices fall much more sharply than they rise, and that
is what you are betting on—violent price action. Consequently,
puts give you more bang for your buck.
There is also another advantage; puts are usually cheaper
than calls. This is due to the fact that puts and calls are priced
based on the cost of holding the underlying position and a call is
a surrogate for the stock. Owning a stock is more expensive than
shorting a stock, the purpose of a put.