Swap high-flying stocks for cheap call options
The guest argued that investors holding highly appreciated mega-cap stocks should swap their equity exposure for cheap call options to protect against downside risk while maintaining upside participation.
The argument
Curnutt used Microsoft as an example, noting that because the stock has risen in a low-volatility environment, its option prices are exceptionally cheap. He compared buying these calls to purchasing 'flood insurance in a drought,' allowing investors to take chips off the table while limiting maximum loss to the premium paid.
The thesis, stress-tested
✓ What validates it
- ✓Implied volatility on mega-cap tech stocks remains near historical lows, keeping option premiums cheap
- ✓A sudden market correction where the long call strategy significantly outperforms direct equity ownership
▸ Risks discussed
- ▸If the stock trades sideways or declines slightly, the premium paid for the call options will be entirely lost
- ▸Tax implications of selling the underlying equity could offset the benefits of the trade
Hear it yourself
"So here you have a chance in a bellwether stock that everybody's long, obviously, to take your take some chips off the table into an option for which the marketplace is really not charging you very much for the insurance, for the very reason that you haven't needed the insurance. You know, we call it flood insurance in a drought."
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