nothing wrong with buying leaps.....
providing you trade out with a profit....but what happens to the trader who jumps in at a much higher premium and gets squeezed by time.....sort of a legal ponzi scheme....
the seller or writer however, gets his premium today, and could care less who flips, who wins, who loses...other then himself. the premium is cash in pocket...not cash out...cash is king, it allows you to set long positions and grow your portfolio, increasing your inventory to write covered calls when the issue is overbought.
puts against cash are less risky than buying long calls. you know your downside, you are dealing in an issue you want to own,and if you change your mind you can roll forward through the longest of sell offs...
you must deal in underlying issues that have strong volatilty...look for exagerations of underlying selling or buying, such as what is happening to dell today...the rabbits are out trying to buy insurance(puts), they over react to the situation and premiums swell...the opposite happens on a strong up day..the call buyers come in a try to leverage on an issue they believe is going straight up...
i will sell long term (leaps) puts at strategic moments and use the cash to go long the common...you could even buy leaps calls, and create the spread...let me show you an example:
on 12/31/97 i sell 40 contacts cpq jan 00 40 puts (lkpmh), the common is at 28...i receive 1425/contract, total 57k...i go long 2000 cpq @ 28. if i closed the position today it would cost me 600/contract to buy back or 24k, i sell the common @ 43 giving me 86k....86k-24k=62k + 1k leftover=63k profit in 14 months...but i will risk my position that compaq will be 40+ in january...
the returns are there...providing you have a desire to own your put, and most important have the capacity...for me to be in a loss position compaq would have to trade below 25.75 in jan 00 (40-14.25)...and if it did, and i didn't want to own i merely roll forward to 01, and get more premium...until the bet goes my way....
keep it simple...you want to raise cash...if you have capacity, sell 20 dell jan 01 85 puts (zdemq)....get 2500/contract=50k, go long 500 dell...think it through it works, and the leap gives you sufficient time to repair when you are the seller |
