It looks to me that if your holding period is long, the European-style options are a much better deal. The LEAP puts on the Dow have a negative time value, which seems amazing to me. I mean, instead of paying a premium, you get a discount. For about $4,000, right now, you buy the right to sell the Dow, in December 2003, at $14,000 --and the difference between last Friday's closing price and that is: $14,000-$9600=$4,400.
If this were an American-style option, it would cost $4,400 plus some time premium. Estimating from a comparable option (American style) on the QQQs, I would say that you might have to pay as much as $5,000, or about 25% more than $4,000.
Now for short term trading, less than a month or two, this does not make a difference. But for a two-year holding period, it makes as much as a 25% difference, and that goes a long way towards reducing the risk of trading options.
Or so I think. As I say, I just figure out my own ways of trading and do what works for me. Earlier this year I was regularly shorting and covering the QQQs. Some people do not believe me when I say this, but it is a fact that my trading account is up over 80% for the year and my problem now is to set aside enough money to pay a tax bill that is going to be about twice anything I ever paid before in my life. Of course, the really big money was made in riding the bull mania up, which I did not do. |
