That's a risk-reduction strategy that I don't like, because it gives up most of the potential upside. By the end of 2002, the stock could be a lot over 70.
What I did in late 1998, when I bought longest-term AMAT LEAPs, was to also buy NVLS shorter-term puts. My plan was, if the stocks kept going down, I could sell the NVLS puts for a profit, and use that cash to buy more AMAT LEAPs, at lower prices. As it turned out, the stocks took off, and I lost everything I had put into the puts. But I made about 40 times as much money, eventually, in the AMAT calls.
The other risk-reduction method I use is to buy in increments, because I don't think I'm smart enough to time the bottom exactly. For instance, in 1998, I thought AMAT would go to a P/S of 1 (industry conditions seemed as bad as in 1996, when the stock hit that valuation), but I started buying a lot higher, so I managed to get some (at what turned out to be the exact bottom, although I didn't think it would be at the time).
If AMAT stays at 40 for a prolonged time, and market volatility decreases, the premiums for the LEAPs ought to decrease. |
