America On-Line: will it survive ...? Message Board

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Technology Stocks : America On-Line: will it survive ...?

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To: chenys who wrote (3130)	5/15/1997 3:40:00 PM
From: yard_man	of 13594

q y: Sorry I misunderstood. The point of my original post was that this was a strategy I would like to employ. I have not done it. My idea was this: I've spotted a stock that's dropped substantially and it looks attractive to me at that price, but I'm not sure if it's really bottomed or not. Usually it's just best to wait. I didn't wait with GEMS and it broke to lower levels. I want to average down. So instead of buying it at where it fell from my original purchase, I'd would have liked to sell a put close to that price or slightly below it. If the stock continued to fall (as it did in this instance) I would pick up the shares, but my cost basis would be lowered by the premium received for the puts. If the stock price moved up and didn't make it back down I would be able to keep the premium lowering my basis on the shares already purchased. You appropriately identified the down-side: While you're short the put(s) the cash is tied up that it would take to buy them. Some brokers might let you simply have enough for 50% of the purchase remain in the account. I'm not sure. My broker won't allow me to do it even if I let all the cash remain there. So right now, I can't employ this strategy unless I get another broker. Hope what I've said helps. >>Because they would put aside the cash in case your naked put got execised early. I have used your strategy on MNPI before CPQ's buyout. I was conservative and sold a July put @2.5 for atrike of 10 while it was at 8 something. Then it shoot up to 16 in a few days. If I only know it'd happen so soon I'd have used higher strike price.<< Not sure I understand your example. You sold a put that was in-the-money by 2 pts, right. Then the stock went up and you didn't get exercised? You got to keep the premium without being exercised. If you had used a higher strike you would be taking on substantially more risk -- what if the stock went to 6 instead of 16? I think what you did was good if you felt you had a good feel for the stock having hit its bottom. To sell a higher strike would have been considerably more risky. Regards Barry

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