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Technology Stocks : Compaq
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To: Tim Wash who wrote (23063)3/23/1998 3:25:00 AM
From: Mike Gordon  Read Replies (1) of 97611
 
Tim:

Well the first thing you're doing right is identifying a goal. If you're content with 10% between now and the end of the year, the question becomes is this the best use of your available funds. That's a decision only you can make.

When selling puts as an opening position, you should be in cash to represent the strike price. For instance, 18K should be available for the sale of 10 Jan 99 20 puts. Your 18K should be receiving interest earnings during the life of the put. CPQ downside risk is at a minimum based on the characteristics and fundamentals representing this issue.

I believe the conservative CPQ range between now and January is between 20 and 30. Therefore, if I wanted to be conservative, I would probably go with the Jan 25 puts at 4 3/8. Even the Jan 30s at 7 3/4 would not be a bad strategy.

Calculate your rate of return on both these positions and compare it with a similar strategy of doing near term puts monthly. For example, sell 10 April puts at 22.5 for 3/4 to 7/8. Monthly returns on this play is more rewarding. However the risk is increased considerably. When the issue is put to me, I simply turn around and sell covered calls.

Study your strategy well. The sale of calls and puts will always limit your up and down side potential. I set a goal for myself of 30%. Being proactive is better than waiting for the stock to go up in price. It's educational and gives you an opportunity to maximize your investment.

Good luck. Looks like you've thought the process through. Don't be greedy and stick to your goals. Let me know if I can be of help.

Mike
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