David, Your strategy is terrific if MU goes up. You are rolling up and out in price and time, respectively and you are insuring yourself against disaster by buying puts. I think you have to be a bit flexible on when you roll, as the stock price alone is not the whole shebang, but WHEN that price target is hit.
Some comments:
If MU goes over $25, I believe you will find the October 25s awfully expensive. Not only will the stock be at the money, but the increased volatility of the rise from the dead will be in the premium. I would opt for JFs right then, but then, I am an out of the money player.
Secondly, though I think the strategy is great, I don't know how much these positions mean to you relative to your net worth (as an investor, not as a human being <G>). I do know that you are buying a heck of a lot of pure premium, and even MU sometimes does nothing. That would also be a losing situation.
So, here's how I see it. If MU runs above $28, you are going to make lots of money. If it goes above $35, you can adopt me or at least make me heir to your fortune.
If MU goes down, you give up some opportunity profits by selling the July 30 puts without rolling down and out. But not making money is not the same thing as losing money.
If the stock stays flat at $25 or so, you are going to suffer a lingering death on the time premium. I consider this the least likely scenario, but it has happened in the past.
EAch move you are making on the way up seems to keep you in the same cash risk position as when you started, assuming the premiums behave as I suspect they would. I don't like that. One of the worst things you can do is lose money when you've called the stock right. I would opt for holding the number of contracts constant, which would mean that you were taking profits off the table on the way up. Of course, the puts offer some protection, but not full protection, and you are putting out extra premium for them, too. For example, if I buy $5000 worth of options, when I roll up or down, I take profits out. If I sell my options for $10,000 or $15,000, I may still like the same position up and out or down and out, but I only put $5000 into it, stuffing the rest back into the 90% part of my 90/10 portfolio. What you are doing is a very conservative version of pyramiding, and it is what Peter Lynch did with Chrysler to score his homeruns. But it is very risky. This falls more into the category of different strokes for different folks, but I hate to lose when I am right. <G>
MB |
