No. of Recommendations: 3
xFatOtt -

You've done an excellent job of highlighting the problems of using complex strategies without completely understanding the ramifications of doing so.

I have a point to add from a fundamental investing standpoint. The premise of the article seems to be that stock prices wander around for no particular reason at all, and that it is possible to say something like "if this stock falls 20% in the future, regardless of the reason, I will definitely want to buy."

In reality, stocks often fall for a good reason. If you merely do nothing and wait for the stock to fall to your target price, you get a second chance to evaluate it at that point. If something in the company's fundamentals has changed and that's the cause of the fall in price, then you get a second chance to decide whether you really want to invest in that company. If you write the put, you're stuck, even if you'd really rather not invest given the new situation the company is in.

As you point out, if the stock price is high, you may not get enough option premium to justify the risk that the fall in the company's stock price is due to something that would make you not want to own it.

dan
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