>>I really am having a difficult time following your
plan...doesn't mean it isn't brilliant...
Well I described it in rather broad terms. Also note
that I am not claiming that it is brilliant, only that it
is a strategy for playing options without assuming as
much risk. More on the strategy below.
>>The further out you buy PUTS the less volatile they
are, the more expensive they will be, and the higher the
commission you will pay to buy and sell.
True, true, and true! However, the time premium I pay
for the amount of time I get is actually less. Consider
the Feb 35 put, which I could sell today for 1 1/8. It
has only 10 days of life! Let's say I sell that today, I
get 1 1/8, next month I sell the March (for more than 1
1/8, because I'd do it as soon as Feb expires, let'say I
get 1 1/2 for it), and April, May, June the same way.
I've pocketed 1 1/8 + 4*(1 1/2), or 7 1/8. (Again, I am
assuming that MU stays where it is and they all expire
worthless, a phony assumption but hang on.) Look what the July 35 put costs me to buy: 4 7/8. So if I were to buy the July 35 put and keep selling all those other options every month, I would have paid 4 7/8 but pocketed 7 1/8; I have 2 1/4 in my pocket and my July puts are paid for! *Or* I might have bought more July puts with the money I got selling the Feb, Mar, etc. puts. Now on a big dump in July I clean up.
NOW THEN what about all those phony assumptions. We know that MU doesn't sit still. Which brings us to...
>>As far as MU being 30 by Feb expiration I think the probability is less than 50% so why go that route.
That's a very important question indeed. Go back to my example -- do I want to sell a 30 put cheap that I am nearly certain will expire worthless and pocket a few 16ths, or do I want to sell a 35 and pocket 1 1/8, but maybe have to buy it back for 1/8 or 1/4 or maybe more at Feb expiration. It depends on where you think the stock will be at expiration, you want to sell the most "hot air" you can. This can be pure time premium, or a short-term dip that you think is going to reverse, or a combination. An excellent book which describes this in more detail and example is "Options As A Strategic Investment" by Larry McMillan.
>>I guess what confuses me is that you are buying today, where MU has n/t support instead of two days ago when it was up against overhead resistance.
Fair enough! It is a question of which T/A to believe in, support/resistance, volume changes, price spikes, Bollinger Bands, oscillators, et al. We all saw how many times MU blew through overhead resistance since December, and to be fair how many times it seemed to be short-term double-topping, and blew through those too. The amount of volume I saw on that Brown Bros. bad-mouthing was way out of proportion to their influence in the market and the number of upgrades/downgrades they have made since 7/97. (65 or so -- Alex Brown, which happens to have been next in the file I used to count up upgrades/downgrades, had over 200, the big boys like Merrill Lynch had over 400 in that time period.) Ok so that's not technical analysis, but it was the sign to me, that we did *not* have on the previous day at resistance, that the move up was OVER! 11.5M shares! People were looking for an excuse to get out.
>>I always thought you were long-term positive on MU
I am halfway between Larry and Skeeter Bug -- I try to be unbiased, however I believe that at least in the short term that this run-up cannot be sustained. When I believe that MU will be going up, I will try to make money on the long side. This is definitely not a buy and hold stock, it's more like corn futures. The scams are to be expected in both directions, it's just that lately we have seen the pump-and-dump almost exclusively. We haven't had much opportunity to see its upside-down partner lately. We'll have to figure out a catchy name for it. |
