From time to time, I get an email asking why I choose to buy an option instead of shorting a stock.
There are any number of reasons I would buy an option:
- Percentage Gain – this is the most obvious. If you short a stock, the most you can possibly make is 100%, and even that is virtually unheard of. I mean, if General Motors is still trading with a $428,000,000 market cap (as of today's close), how likely do you think you'll find a stock that has gone to $0.00? Anyway, as of this moment, my best short gainer is symbol BOOM (a 28% gain) whereas my best option gainer is RIMM September $100 puts (a 64% gain). Both of these happened to have been bought on June 11th, but the option position has over twice the percentage gain of the short.
- Stock Isn't Available -there have been more than a few occasions when I was salivating to short a stock but it was nowhere to be found. Often in these cases, the bid/ask spread is wider than Christine Romer's elastic waistband, but I succumb in any case, because I really want to be positioned for that stock's supposed fall.
- High-Priced Stock -this is really a cousin of reason #1, but I like to own puts on multi-hundred dollar stocks like CME and BIDU since there is such a good opportunity to get a lot of "juice" out of the stock's fall. This is particularly attractive as in recent days when the VIX is pretty low.
One other thing – – the single most encouraging indicator for me is if my portfolio value goes up even in the face of a market going the other direction. In other words, I was almost completely short today, and even though the Dow kicked up 44 points, almost all my positions moved in the right direction. (It was a lot more in the right direction earlier in the day, but I'm not complaining).
I really like what the market is doing right now. I think a bad storm is coming for equities, and I feel comfortably positioned to take advantage of it, particularly if we click below that all-important 875 on the S&P 500.