Why is everyone so optimistic?

[frommi]

Ok i understand that you reduce your premium by selling puts on other stocks, that makes a lot of sense to me. So you don`t suffer in a sideway market.

Your blow-up risk is when JPM,C and SHLD fall to zero and BAC stays where it is when i understand that correctly. I see that that is not really realistic, but there is still a small chance left.

 

Your strategy is not bad, but when margin rates go back to >5% it can be hard to stick to it. Given that you already have a big networth number, is it really worth to risk everything for higher returns? Leverage always sounds like a good idea until it doesn`t and than its too late.

 

 

[PJM]

In Erics case it makes only sense because of taxes. But i find even that questionable. When buying puts would be a great idea, than why don`t we buy only puts?

 

It's not just about taxes.  The outright explicit purchase of puts makes more tax-strategy sense than going with either the warrants or the calls (but both of those alternatives have implicit puts).

 

I do not have any other income!  This money is my entire bread-and-butter.  I don't keep cash on the side.  I can't let BAC slide to $5 again in the next super-worry of the market.  So I have puts to ensure a given level of wealth.

 

Lately I "raised a bit of cash" by moving up the strike prices of the BAC puts and writing a notional-value-offsetting set quantity of "somewhat" in-the-money puts on JPM and C.  For example, today I wrote a few $52.5 strike C puts to pay for some $17 strike BAC puts.  This gives me less "notional value at risk", but I expect C to close above $52.50 at expiry so I expect the cost to be zero despite lowering my risk.

 

Anyways... too much info.

 

Eric - Would your strategy be any different if you didnt have to worry about taxes, meaning if there were no capital gains tax?