Yes, I am talking about # contracts.
If I had a fixed amount of money to invest in a company, I would not do it OTM. I would do what you described or, in this market, probably go all common. What I am refering to is controlling a large # of contracts with a relatively small amount of money. I only do this with stocks that I am uncertain about, or if I am uncertain about the market direction, or if I think a company is about to move much higher.
For example (warning, these numbers are just estimates from memory):
I liked CREE's prospects, but was unsure about the market for high power LEDs. But I sensed a lot of mo moving in. Instead of investing a large sum, I invested around $3000 in 10 OTM contracts at about $3. CREE took off, and those contracts went to over $30, though I closed them at $30, for a 10 bagger and $27,000 profit.
I could have invested the $3000 in common or DIM options, but would only have a 2 to 4 bagger out of it. OTOH, if CREE had crashed back down (as was a possibility, and which it did later), my max loss was $3000.
I was lucky that time, but not with this other example, MSFT. When MSFT was 105 in early April, I bought 100 May 130s (as I recall) for under 50 cents each, for a $5000 investment. My bet was that msft would settle with the govt, and if so 140-150 was in the can. The 130s would have been worth 10-20 intrinsic + time value, maybe 15-25 each, for a possible gain of over $200,000. As it turned out, the talks collapsed and my calls expired worthless, but I only lost $5,000. If I had invested in common instead, I would have invested much more than $5000, and lost more when the stock tanked. OTOH, I could ride it out with a recovery whereas the calls are gone.
Just two examples to illustrate what I have been doing.
Warning: this is an extremely risky game to play, it is gambling, and about as far from LTB&H as you can get. I only do this with money I can afford to lose, and keep that money separate from my core retirement account. Don't try this at home <g> |
