Herm writes: That is why I like the "Sneaky Pete" approach to entering a position.
So let me see if I understand Sneaky Pete. You buy a call, wait for the stock to appreciate 3-5 points, exercise the call and sell the new call. Is that right? So XYZ at 52, buy a 50 Call. XYZ at 55, exercise and sell a 55 CALL?
The problem I have with this is the loss of time value premium. It seems to me you bought it with your 50 call, and you lose it when you exercise. You get some back (maybe even more when you sell the next call), but that's just a swap. One eighth on 1 call is $12.50. I generally figure that at the outrageously high discount prices I pay, it takes a minimum of 4 of anything: 4 hundred shgares, 4 options, etc, to begin to make money without giving a significant percentage of it to the brokerage house. Thus, I would never buy less than 4 calls nor sell less then 4.
On 4 calls at 1/8 time premium each, I just barely make more than my commission cost selling the calls. Therefore, selling the calls and buying the stock rather than exercising is a profitable transaction [unless your broker lets you exercise for no or a very reduced commission, in which case, who are they?]. A stock generally has to be pretty deep in the money, or ATM just before expiration before it only has 1/8 time premium.
Have I misstated the scenario?
|
