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Strategies & Market Trends : AIM Questions and Answers

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To: OldAIMGuy who wrote (170)	7/16/2001 11:34:22 AM
From: labestul	Read Replies (1) of 221

Thanks for the explanation Tom but I still don't understand. Let me first try to restate your argument / example in my own words. Please let me know if I have failed accurately to describe it. Then I will explain why I think the argument is wrong. Before all of that however let me ask you a few questions which I had not thought of before but which your previous post suggested. In your example you suggested that would receive $150 for selling the option and that of this $80 be required to pay commissions, and taxes etc. My first question is: Is this amount typical on options trading? My second question is: Since the $150 was considered income for tax purposes would that same $150 be considered an expense (and hence a tax deduction) for the person who purchased the option? Anyway the essence of your example and argument could be given as follows: (1) You currently own shares whose price is $25 per share. The next AIM directed buy is for $20 per share (assuming no sales are made in the interim). The next AIM directed sell is 100 shares at $35 (assuming no buys are made in the interim). Finally if you did sell 100 shares at $35 (or possibly more) you next AIM directed sell would be for 100 shares at $40. (2) You have the chance to sell an option to deliver 100 shares at a strike price of $35 (exactly your next AIM directed sale) for which the current price is $150 of which you would pocket $80. (3) The amount of cash you currently have (even with the addition of this $80 should you choose to sell the option) is not enough to act on the next AIM directed buy. (4) In this case you give an example of the share price raising to $37 per share but the option is not exercised and then the price suddenly drops to $20. You did not sell shares at $35 or even $37 because of the outstanding option. Therefore you not only missed the AIM directed sell opportunity but you also missed the AIM directed buy opportunity. Thus you conclude that when cash is too low one should not sell options. I understand, I believe, this argument and I agree with it assuming that one were to act in the way you described. However I think that if one took a more proactive stance on managing the outstanding options then this would be a great profit opportunity. In your example once the price per share reached $37 I would immediately do two things. I would first cancel the option I had sold by purchasing it back. True this would cost me more than I originally paid but I could then turn around sell the shares at $37 which is more than AIM wanted at $35. Also I would also sell another option for $100 shares at $40 (my next AIM sell price). The return from the two options which I sold together with the extra $2 per share over the AIM recommended sell price should more than cover the cost of the option that I purchased. Therefore I could still have money for the next AIM buy which would now be at something higher than $20 and I should now have at least as much cash towards that as I would have had I not been involved with the options. Does the above strategy make sense to you or am I overlooking something fundamental? The only possible flaw that I can see is that the stock prices might change too quickly to allow me to effect my strategy. But should this slight possibility be used not to use this strategy? For example there is a slight possibility that Buy and Hold can out perform AIM in the long run. I'm sure that no AIMer would agree that therefore one should not AIM. Barry

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