E,
Seems like right now would not be a bad time to take a true gamble on this stock - buy far far out of the money options six months out as a very small part of your overall portfolio. Every 9 months or so, the market has a sizeable correction (>10%), and every time everyone (including myself) says that it's the end of internets. But the internets always rebound with a vengence, far surpassing their pre-correction highs.
Right now the ATHM Jan 2000 200 calls (AHUAT) are being asked at 4 1/4. I am thinking about putting aside say 5% of my porfolio in them especially if they go lower. Suppose that this is just another 9 month correction and not the Big Kahuna. If so, I have full confidence that the internets will rebound, and rebound in a hurry. If say the ATHM rebounds to its previous high of 198 within a couple of months, this option could be in the 20's. (This is just an approximate back of the envelope calculation) If say however ATHM reaches new highs, then the sky is the limit. For example, after the last correction you mentioned, the price of ATHM quadrupled from it's Sept 1 low of $23.5 in approximately 4 months. If say ATHM were to quadruple from its current low (assume $75) in four months, it would have a price of $300. The Jan 2000 200 option would be worth at least $100.
I know a lot of things have to go right for this to happen:
1)You have to get in close to the 9-month low.
2)This correction has to be just a correction, not the Big Kahuna.
3)The internets have to rebound with a vengence like that have after the past two corrections, and rebound in the next 6 months.
4)You have to pick a stock(s) that will remain favorites of the internet sector. (I refer to ATHM as an internet stock only because that's how it viewed by the Street)
Because so many things have to go right, and because this would be an outright gamble and not an investment, it's prudent to risk only a small part of the portfolio (5%).
Therefore, the downside to your portfolio is limited to 5%, and the upside is huge, if everything happens as it has happened during the last two 9-month corrections.
What do you think of this strategy? Comments? |
