I believe options have to be traded in a margin account, but I don't think they can be used as margin -- in other words, with stock, for $10,000 you can control $20,000 of stock; but with options, $10,000 of options controls only $10,000 of options (but that effectively controls many times that amount in stock -- for instance, a contract that costs $5 controls a hundred shares for just $500, giving you ten times leverage in terms of money to be made or lost on a movement in the stock price).
Someone please correct the above if I'm wrong.
To raise the money to buy them I had to work for a couple years in the software industry. ;-) Currently, it takes money to make money. I do not advocate trading with money you cannot afford to flush down the toilet. And I'm completely serious, if you approach it from that angle then your losses won't hurt as much -- definitely don't use credit cards or margin yourself to the hilt just because it looks like a good thing, as then you may not be able to weather a downturn (I had an expensive lesson in margin calls back in February 1997).
I do not yet sell covered calls, but it's something I'm thinking of. Not sure I want to take the risk that the stock will be called out from under me, though. Am thinking perhaps this coming week I might sell some covered calls on the stock I hold now.
The only problem is, as you say, the stock being called out and missing 10 points of a 20 point run (for instance). But covered calls are a fairly safe investment -- they provide a small income each month (as long as you sell them every month), or you can use it to lower your basis (better for taxes, but since I haven't played them I'm unfamiliar with the tax aspect); and although they do place a cap on your potential gains, you can always buy them back if it's getting too close to (or past) your strike price.
Interesting idea: using margin, I purchased twice as much Dell stock as I could have. Then, if I sell covered calls against the entire amount of stock, I will have twice the "income" from selling the covered calls (assuming the stock doesn't rise past the strike price).
Thoughts?
The only problem with that approach is that I expect the stock to keep growing strong, so I'd actually be better off buying more longer-term calls (like, 2 years out -- for only $20 or so for the Jan 2000 50 calls, and if growth continues, that'll be about 2 splits later -- the stock will be worth 200, so at expiration the options will be worth 150, or 7.5 times your money in two years. Start with $130,000 and you'll be a Dellionaire in 2 years).
Or if you do the above play with the initial $15,000 (260 shares), then in 2 years it'll be $112,500, and then the following 4 years:
112,500 x 2 = (1)
225,000 x 2 = (2)
450,000 x 2 = (3)
900,000 x 2 = (4)
---------
1,800,000
So you would be a double Dellionaire in 6 years.
Or, you could start with just $7,500 and be set for life. How many of us have that much room on our credit cards? <VBG>
Cheers,
KenB |
