I'm interested in the idea behind buying XLE Leaps at this juncture.
"50 XLE Jan '07 Strike price $40"
At the current price these cost $6.40, or $32,000.00 before commissions. On my risk curve a drop to $38, which seems at least possible, if not probable, would take the position value down to $22,300, or a 30% loss. For the opportunity to buy this position at a 30% discount, and assuming its current downtrend will continue until there, I am faced with the question of why buy now? Or, why not wait for a lower price and a better signal?
As another approach, you could hedge your position somewhat by selling the Jan 06 45 calls against the 40s (or the 43s or 44s, etc.). The 06 45s could be sold, now, for 1.80, bringing in 9,000, and lowering your cost on the diagonal spread to $4.60, or $23,000. Any pullback to $38 would put about $4,000 worth of profits into the short position, partially hedging against the $9,000 or so loss. Of course, if XLE did not stop at $38 but rather kept going down (these things can happen), your hedge would continue to partially protect you until you bought it back and remained with your unilateral long Leaps position. At that time presumably the FA analysis would kick in and you could enjoy the benefits of a long LEAPS position until Jan 07.
The hedge itself is not without risk, as a sudden rise or fall in XLE could lead to an unprofitable position, but that level of detailed analysis is probably beyond interest at this point.
Looking forward to expiry, those XLE Leaps will double your investment at XLE 53, triple it at $60, etc.
Kb |
