<option plan for AMAT>
For AMAT, I'm guessing 12-30 is the range, for the next cycle trough and peak (next 18 months???). So, I'll probably start buying the longest-term options now available (WPJAD, Jan 2010 20s), if the stock hits 15. I'd prefer using Jan 2011 options, but they aren't available yet. To increase the chance of success, I'll buy in increments, not using all my cash until (if) the stock hits 12. Then, I'd start selling when the stock hits 20, and continue selling in increments till 30. As the option gets to within 6 months of expiration, I'll become much more willing to sell them.
Another choice is to use KLIC (the stock) instead of AMAT options. KLIC has the volatility of an option, but doesn't expire. It can be counted on, to give back all gains on downcycles. The stock hit 2 at the 2002 low, and peaked at 17 at the 2003 high. Would an AMAT option have done any better?
I'm assuming you don't mean using options as downside protection for a long position.
option Cons:
1. Options lose value quickly, in their last 6 months.
2. The transaction cost (mainly the spread, not the commission) is huge, compared to stocks.
3. In order to make money, you have to guess right, not just about where the stock is going, but when.
option Pros:
1. If your guesses are right, you'll make a huge % gain.
I've made a lot (and lost some) money using options.
Rules for using options:
1. options are a form of gambling, which means you should be willing to lose every dollar, if things go against you.
2. To increase the chance of success, buy the longest-term options available, and plan on selling within 6 months of expiration, to recover the time value of the option.
3. Because of the high transaction cost, it isn't worthwhile using options (instead of the stock), unless you expect at least a doubling of the stock price, over the time period you hold the option. |
