money machine and volatile techs: I started option trading with this strategy in August (and I've used no other - prefer to be safe). The only time I've been burned was with SEG - sold 35 puts when it was at 38, the day before they released earnings and it crashed through its previous support level to 32 or 33. I have since averaged down to 27.4, and I sold June 27.5 calls to cover margin interest. Even taking interest payments into account, I'll end up with a slight profit if I get called in June. If I don't get called, I hope to continue to cover interest payments by selling 27.5 calls one month out. I only need 19 cents/share, and I think this is attainable if SEG remains around 24. I think the stock will recover, but I am anxious about SEG's loss of market share to the big players.
But after 2-3 option trades/month in various stocks, I have concluded that it's best to use this strategy with the volatile techs -- mainly because you get a high premium for the puts and there's also a strong market for subsequent covered calls. Also: when a volatile stock bounces up, you have a chance to close your position with a profit and then either roll up your puts on switch to a different stock. For example, when Feb options expired, I sold Mar 25 Oracle puts for 1 and 1/16 (stock price 25 and a fraction). After their positive earnings report (phew!), I just bought back my puts for 1/16 and sold Mar 25 Compaq puts (stock price 25 and 3/8) with one week to go for 7/16. In both cases, I felt the stocks had been beaten down by negative news and were unlikely to fall too much further. If Compaq, for example, falls to 23, I am likely to make a point or so on covered calls while the margin interest (I pay 8.4% with Waterhouse) amounts to 18 cents per month. Sorry if I'm beating a dead horse, but I like the strategy... I would also add that I have been very grateful for the high quality posts on SI (contrast with Yahoo!), which play a big role in my decision-making. I was happy just to read, but I registered (one month free) so I could jump in on this discussion. I hope for more feedback/ideas... Dave.
PS I'd gotten $1/share for those one-month SEG puts at 35. At this point, though, I've concluded it's better to sell puts on stocks closer to the strike price. Had I done that initially, I'd be substantially further ahead. |
