Tom, O.K., that is kind of what I figured he was saying. There is nothing wrong with this strategy if you can get high leap prices. In fact, it is a good idea. However, you are taking more risk and have less reward potential. You can make 50% and lose 75%. So, the key here is to pick stocks you think will not go down, not to pick stocks you think will go up. Sun, Flip Morris, and Loral would rate pretty high on my list of risky issues. (BTW, I like Loral, but I can't ignore its risk. I don't like Sun or the lung cancer folks). I would look more for the stable blue chips, like GE and Pfizer, but then you will not get the high premiums.
A much better strategy, IMHO, is to do a bull spread, either debit or credit (I almost always prefer credit). In the debit version of the Sun Trade, you would buy the $35 call and sell the $45 against it. The profit potential is slightly higher and the risk is much lower. In the credit version, you would sell the $45 put short and buy the $35 put, generating a cash credit and protecting your downside. You also put less cash to work, which either means you can hold money markets in case you lose, or you can leverage the position if you are really in love with the stock. MB |
