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Zumba,

You wrote, I disagree a bit here with Joel.

Disagreeing is fine with me - I'm hardly an options expert.

Also, I would not recommend buying either puts or calls here - long options are generally a losing proposition because of time decay.

I would say that this statement is generally true - [long] option positions, on average ("in general" is too vague for my taste), are losing propositions because of time decay. Of course when you buy a long position you're betting that you have some kind of insight the market lacks. Either you think the issue is overbought or oversold. In the case of buying a put on an issue you already own, you believe the position is overbought and you want to protect your profits without liquidating the original position - usually because of the tax consequences.

And, But because IV is so low right now, buying some puts as a hedge for your portfolio might make sense.

How do you know the IV (Implied volatility) of the issue mayerzd is considering? He never stated it, did he? One of his holdings in his TMF profile is supposed to be AAPL. Do you really think the IV of AAPL is low right now?

Or are you suggesting mayerzd buy a put against a general market decline? That would fit your comments more closely; but that doesn't seem to address what mayerzd is asking. Of course it could be useful as a hedge, but that depends in part on how closely his portfolio correlates to the broader market.

Also, If the stock you hold pays a decent dividend, it might make more sense to sell calls against the stock instead of sell the shares.

As I stated before, selling covered calls does not protect against downside risk. mayerzd could certainly sell covered calls; but he would be doing so for additional income - not to protect against an overbought position. Also as myerzd observed in his original post, selling a call would ensure he does not participate if the stock price "shoots through the roof." Therefore, encouraging him to reconsider selling covered calls seems to be an inappropriate response to his post ... since he had already ruled it out and was looking for an alternative.

And, ... you believe the stock might drop in price, selling some of the shares to lock in profits might be a better choice.

Well, we're certainly in agreement here - though I think dividends are usually of secondary concern.

Finally, I would not under any circumstances buy calls here. You already believe the stock is overpriced, so a further run-up from here is unlikely. To make money on calls, you generally need a pretty decent and relatively quick price gain.

Actually I would agree with you if that were exactly the sentiment I read into mayerzd's post. My point about selling the underlying and buying the call was to give mayerzd a position that protects his profits and gives him a means of participating on a stock that "shoots through the roof".

However after thinking about your comments and reviewing mayerzd's post, I see that a more effective position might be something like a long straddle. That's assuming mayerzd thinks that the stock he's holding is likely to shoot up or down, but the price is unlikely to remain stable in the coming months. Now if he's just trying to protect his position and willing to accept selling at a price just above the current price, a collar might be useful alternative to a straight put. But FWIW I find it difficult to analyze complex option combinations, so I prefer to let others recommend them.

- Joel
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