Geoff Considine

Profiting from Risk Aversion

Glenn:

First off, the implied vol is sort of a beast unto itself--a reference point. QPP and other tools use different models but by any measure, the price of call options on a range of stocks already captures much of the upside potential. If you expect 8% return on a stock like PG and you can "monetize" 12% and still keep another 10% of potential gain, that is pretty amazing when you think about it. You may be right that there is more upside, but my approach is to be like the house and your approach is to be the gambler---I am betting the odds across a bunch of positions. If I can monetize 12% on a stock with an expected return of 85 and lower risk, I am going to do this--it may not be exciting, but it all depends on your risk tolerance. The market is certainly betting on a lot of upside potential--thats why the options are so expensive--and that is why it is a good time to let the market take its bets.