Well, any other options I have bought, since they were American-style and could be exercised any time, had a time premium that decayed and thereby added to the risk of the option.
The European-style LEAPS have developed exactly the opposite valuation because they can't be exercised until expiration, and therefore the "decay" is in my favor.
This inverse premium, on the puts I own, amounted to about $520 or about 14% at yesterday's close. What that means is that should the Dow still be right where it is now in December of 2003, I would make 14%. Of course, my belief is that the Dow will drop much lower between now and then. Every point the Dow drops adds a dollar to the value of each option. Also, the longer the Dow stays down, the more the "negative premium" as I call it will narrow--and as expiration approaches, say maybe the middle of 2003, I would expect it to acquire a positive time premium like an ordinary December put.
If there is soemthing wrong with my understanding of what I am doing, I would be happy to be straightened out.
Of course, maybe I am totally wrong and the Dow will turn around, soar to 15,000, and stay there. Evidently the persons who sell the puts consider that a possibility.
Given the certainty, however, that "the market will fluctuate," I am betting that at least some of this fluctuation will be downward.
I have already made one profitable (not perfect, but quite profitable) round trip on these puts, selling them in September and October, and reestablishing the position about a month ago. Too soon in both cases.
I realize that shorter term, out-of-the-money puts would be immensely more profitable, but the risk of losing all capital is larger. The use of LEAP puts on things like AMZN, YHOO, etc. worked OK for me a couple of years ago, though I cannot brag about quadrupling my capital. |
