Blog Spotlight: Abnormal Returns
We are delighted to see Abnormal Returns, one of our favorite daily reads, in the spotlight. The strategy suggested is excellent, particularly right now. Take a look at Barry Ritholtz’s post and then come back for our comment.
Another edition of our new series: Blog Spotlight.We put together a short list of excellent but somewhat overlooked blog that deserves a greater audience. Expect to see a post from a different featured blogger here every Tuesday and Thursday evening, …
The use of call options is one of the key approaches of our method. For stocks we like, we buy calls with a delta of about 85 with a view toward the absolute premium paid and also technical analysis of support levels.
If the stock rallies strongly, we "roll up" to a higher strike, perhaps in a longer time frame. If the stock falters, often back close to the strike, we sell the call. This usually gains a higher premium on the sale, cushioning the decline as the deltas fall closer to 50. If the fundamentals have not changed, we "roll down" to a lower strike, sometimes in a longer time frame.
The combination lets us trade around our long positions, trimming and adding, while still maintaining long holdings in our favorite stocks. It also protects against sharp downside moves.
As warned in the excellent Abnormal Returns post, this strategy requires a good knowledge of options trading and careful attention to the premium.