So, if an options novice straight ahead believes SUNW will be x2 on or before JULY expiry, his best bet might be what, in your opinion?
The following is strictly my opinion. I have no idea what your particular details are in terms of assets, size of portfolio, tolerance for risk and willingness to speculate.
The first thing you need to understand about speculating is that the funds you do it with you should consider them lost. (i.e. gone to money heaven).
Second you should speculate with the most advantage on your favor (who said it is a fair world?).
So... having said that...
What I would do is this:
1. NO margin.
2. I would SELL Cash covered puts, (and if I feel cocky) about SUNW prospects, I would go and sell NAKED puts instead. To sell naked puts you will be required by your broker to have certain cash in the account as "option requirement" (similar to a "performance bond), and be approved to trade them. A Cash covered put may not need your broker approval since you are placing the cash in the account for the obligation to purchase of the amount of shares you are contracting in your put options contract.
You should know that one put option contract represents 100 shares, so 10 contracts represent 1,000 shares.
This means I am contracting the obligation to BUY a specific amount of shares of SUNW at the chosen strike price by the time expiration comes.
Now...
Say that by June 2001 you think that SUNW will be @ $54.00(double today's $27.00). Assume (on average) it will leap $ 5.00 per month to get there. 5 x 6 = 30 plus the current 27 = 57 (plus minus)
Here are closing prices for all the puts and calls on SUNW (including Leaps --long term --up to 2 years-- Options)
quote.cboe.com
So I would sell 10 contracts of the near month (JAN/01 strike 27.5) for $3.625
This would credit my account $3,625.00 (for 10 contracts, or 1,000 shares). This also means that if SUNW closes ABOVE 27.5 by Jan expiration (Jan 20-2001) the put option would expire worthless and I keep the $3,625.00 (on NO money invested).
If however, SUNW were to close at or below $27.5 I would then be OBLIGATED to buy SUNW @ 27.5 REGARDLESS at what price it closes (it could be $20.00) the premium of $3,625 is mine to keep as 100 % profit minus commissions.
The next month... (February, I would do the same. keeping the appropriate proportions.)
If I were not "put" the shares, I would sell another put.
If say... that by January you ARE put the shares (forced to buy). You could either add to your existing portfolio or buy back the contract and terminate your obligation. The purchase of your obligation (put contract) could be at a profit or loss it depends on the premium received and how much "in the money" the put is.
Once you are put the shares, you could SELL covered calls on the same shares that you now own. Premiums (strike price $30.00 will be around 2.5 per share (so for 1,000 shares), you receive $2,500.00 If the share price would go past the strike price you will forgo such advance. but you still keep the 2,500.00 if called away, then you would do this whole program again. Every monthly until you reach your desired objectives.
In the above scenario you would receive a total of $3,625 + 2,500 = $ 6,125.00
In the real world it may not be this smooth since there is something called slippage (the loss of bids/ask values while you are placing the orders).
In this scenario you delay the output of your investment but you receive the premiums stated WITHOUT any actual outlay of capital
Having sold the call, the danger exists that you will be assigned and receive only the premium plus profit up to the strike price. Then the next month you would do the same.
Yes more time spent managing these positions, but potentially more rewarding...
NOT necessarily simple either, however once understood... not that difficult.
All of the above assumes a bullish scenario based on the strong fundamentals of what you know about the company.
AGAIN.... MY OPINION ONLY MAKE YOUR OWN DECISIONS |
