Elmo - I have always come to the conclusion with most of the companies I buy (and accumulate) is that I do not have to own them today or tomorrow (ie. no real urgency) and if possible have someone pay me to buy the stock at a price I consider to be at fair "value". Especially with 3COM, I see no reason for a sense of urgency to own this company (with a two quarter turn around) other than a surprise buy out. That is why I plan to use the strategy of selling naked Puts.
If I miss the run, then so be it. There are several other stocks I my buy list that represent similar value and risk....there is no real urgency for me to buy today especially at these levels in the market. Therefore, I continue to sell naked Puts for companies I wish to own and also some deep in the money calls on stocks that I already own to lock in my gains.
On stocks that I accumulate a position in, I focus on establishing a long term holding period (one year and one day) so I can take advantage of the long term capital gain tax rate. Not all the companies I buy are for long term holds but rather they are trading positions I hedge with covered calls that over time may become a long term position. However 80% of my buys I plan to hold 12-18 months (or longer).
My latest purcheses in 3COM were positioned for a 2/3 trading and a 1/3 intermediate hold. I accumulated stock over this year at prices between $20, $22, $24, $25 and $26. On 2/3 of the position I staggard covered calls for different months and strike prices. If the calls expired worthless I then rewrote the calls for the next month until the stock was called away. It is cheaper for me to have the stock called away than to buy back the calls and re-sell them.
Once the company disclosed that their next two quarters would show a slower growth rate, I decided to sell covered calls on my last 1/3 position that not only reflected my lowest average cost but also my longest holding period (about four months).
Therefore, for any new position I accumulate, my long term capital gain clock must be restarted. Any new buys I might contimplate for 3COM must look past 2002 earnings and IMO it looks real fuzzy at this time. By selling a naked Put, I can establish a "potential" positionin the future at a level that I consider to be fair value. I still earn option premium too. Yet, as you stated, with this type of strategy, it is possible for me to miss out on any significant run up in price.
I am not trying to get rich quickly but rather I am always trying to keep my money working for me earning a return from (1) option premiums (2) long term capital gain positions in growing companies and/or (3) using selective buy-write collect dividend option strategies. This investment style has worked well for me during this Bull Market but all bets are off if this market turns into a Bear.
You have plenty of time with your Leap option and I suspect you will do quite well. I believe if you hold your leap for 1 year and 1 day you will also be taxed at the lower long term capital gains rate too.
Here's hoping you see a double (or more!) in 12 or more months. That's a pretty good return in anybodys book.
EKS
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