Tom:
the shorts are either a straddle or a strangle. the underlying stock must be a good stock that you don't mind owning, or doubling the number of shares should you are forced into it.
this is not a get rich quick scheme. as i posted, i have not worked out the numbers and have not decided which stock i would get into.
Warning to all: the following is used only as an example. i do not recommend one way or another, use your own dd.
take the stock jdsu. i am using a straddle.
100 shares of jdsu ( $ 9,000 )
sell 1 put jan01/90 $ 2,300 (make sure you have margin capacity)
sell 1 call jan01/90 $ 3,000
_____________
net cash outflow (no margin) ( $ 3,700)
8 months from now: jan01:
a. jdsu > 90/share, shares are called, put is worthless.
proceed $ 9,000 , net cost $ 3,700. ROI = 5,300/3,700 = 143% in 8 months. fund managers would kill for this.
b. jdsu < 90, call is worthless, you are assigned, out again for $ 9,000 for that extra 100 shares.
now you own 200 shares at cost basis of $ 3,700 + $ 9,000 = $ 12,700, which translates to $ 63 1/2/per share.
c. risk: if jdsu < 63 1/2 8 months from now, you lose money
do you want to take that risk? remember etek is looming in june awaiting govt approval. what if ... ?
d. reward : make money if jdsu > 63 1/2
e. within the 8 months, you can be a trader if you so choose, depending the market, make the straddle into a strangle to increase the cash inflow.
Finally, is jdsu the stock of choice? I would consider as one among several (EMC, CSCO, INTC, QCOM and even MSFT). The main criteria, it should be a good stock, strong fundamental, and one that you don't mind owning. Naturally there is a trade off between volatility and the extrinsic value of the premium.
Good Luck
Paul
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