>>>i have a hard time putting money into a LEAP and letting it sit...then what happens if the stock moves south a couple points..<<<
I have a similar emotional experience. All I can say about the feelings is to know your investment plan inside and out before you put your chips down.
When you buy options you are paying for time. All businesses have to pay for time, and no matter what the financial planners say about "it isn't timing the market, its time in the market," I can assure you that timing is everything. There is no, zip zero, nada difference between you as an equity investor and the CEO of a major refining organization pondering when to build a refinery. Build before the market demand is there and you have parked $3 billion demanding $150 million in interest or IRR w/o any cash flow.
Buying options make me a little queasy. The rewards can be huge. Therefore there has to be a corresponding skill or downside. For options purchasers, it is getting the timing correct.
One way to mitigate risk or the cost of time is to sell out of the money calls against your long LEAPs - often called buying a calendar spread.
I sold my XEC stock at $39.55 and bought the Jan '08 $35 calls for $6.40. Why??? Because gas has been pounded since Jan '06 and is starting to recover. I figure there will be a summer spike either due to heat, hurricane anticipation, or an actual hurricane. I am already in a profitable position wrt the calls. I would have had greater profits if I had held the stock, but I have less cash tied up and my potential loss is $6.40 instead of $39.55. Of course there is no way XEC would dip down to even $35 after the wringing out the sector has had. If we get a run up to say $44 in the next few days, I will consider selling the June $45 calls against the Jan $35 calls. That will limit my upside, but offset the investment in the long calls. Besides, Brian Hunter is out there and after the spike there will be a decline, and I will pocket the June $45 premium, and then exercise the Jan calls in November when we have the pre-winter spike.
How is that for planning?? |
