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Chapter 7. Option Strategies in Down Mar... > Short Puts: A Variety of Strategies

Short Puts: A Variety of Strategies

In a down market, you face the dilemma well known to all investors. You want to take advantage of buying opportunities, but you're not sure where the market is going. The conservative point of view should be to recognize down markets as the chance to pick up more shares of your favorite stocks. This not only represents a bargain; it is also a way to create new paper profits. When you buy cheap shares, you lower your overall basis in a stock, and that improves long-term as well as current income potential.

Given the fear factor in down markets, you may hesitate to put a lot of capital into shares. What if the market continues to fall? What if it takes months instead of days to recover? Anyone can look back over past pricing patterns and identify the obvious timing of purchases, but it is far more difficult to do in advance. This is where short puts are especially valuable. There is always the possibility that stock prices will fall and not recover. This danger exists whether you use options or not; it is a well-known investment risk. The value of using options is that strategies may exploit temporary price declines. When prices fall and remain down, options reduce the losses (if you use short options) or provide the opportunity for recovery with limited additional cost (if you use long options). For many conservative investors facing possible losses, using options in short strategies is more appealing than going long, because at the very least, it involves receiving payment instead of spending more capital.


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