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Strategies & Market Trends : Options
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To: SecularBull who wrote (7819)5/23/2000 12:03:00 PM
From: Bridge Player  Read Replies (3) of 8096
 
Here is an option play for LTB&H players with lots of patience. I believe it has a very high probability of a low-risk double after 20 months.

Microsoft is down roughly 50% from its highs as a result of the lawsuit uncertainty and the technology weakness.

The MSFT Jan 2002 60 Leap call is 18 1/2 bid.
The MSFT Jan 2002 70 Leap call is 13 3/4 asked.

You should be able to put on a bull call spread for $5 or less, half of the $10 spread. If you are willing to gamble some and attempt to leg into this spread by buying the long side first and waiting for a rally to put on the short side, you can probably put it on much cheaper, and possibly at no cost at all. Within the last 10 days the 70 call was 18 1/2 asked. Note that with stock and option price volatility these prices can change literally in seconds.

Two cautionary notes. One, this kind of play is grindingly slow in realizing its full potential, which does not normally occur until close to expiration. Two, it is extremely likely that the short side will go significantly into the money well before expiration, and you would thus be subject to an early assignment. If that happens you just need to also exercise your long call to get the full profit potential.

With these caveats, I think that the probability of MSFT being over $70 in January 2002 is at least 90%, giving odds of 10-1 or better for a double vs. the loss of all of your investment.

Edit: MSFT trades around 64-65 at the approximate time of this posting.

BP
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