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Technology Stocks : Micron Only Forum

MU 237.94

-0.2%

Nov 7 9:30 AM EST

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To: John Graybill who wrote (44162)	3/24/1999 2:01:00 PM
From: Land_Lubber	Read Replies (2) of 53903

For example, I am considering an April 55-50 put spread. So I would buy a 55 put somewhere below 55 and try to sell the 50 on a nice quick drop to 50. Great idea! I was wrestling with a couple of inverse tactics last month, until I realized that neither one of them made enough sense. Your idea is bullet proof, I think. The first thing I had in mind was buying the put spread first and later closing the short leg when the stock was up and it could be closed cheaply, the problem with that is that it takes an extra shot of cash that can usually be better spent elsewhere (in terms of potential percentage profit). The other idea was to close the long leg when the stock bottoms out and ride the naked short puts up on a bounce. I actually did this, but it turned out to be a big mistake. For one thing, my broker slapped a margin requirement of 25% of the market value of the underlying shares as soon as the naked leg was exposed. This was about twenty times what it would have taken to close the leg. I couldn't believe it (nor meet that requirement). Still, I was reluctant to close it with cash, since it was set to expire worthless in a few days. I ended-up buying another long leg of puts the next month out to cover it as a calendar spread. The other disadvantage with this idea (closing the long put leg at a short-term bottom) is that it leaves you exposed with a naked position that you only expect to be profitable for a very short while. If your timing is off -- big losses! I like your plan very much. Start with a straight option position in the direction of the expected medium-term action. If a short term reversal appears to start at some point, sell another strike to make a spread at that time. Since there is no margin requirement this will actually add cash to your account. When the short term reversal appears complete, dip into this little stash to close the short leg and resume the medium-term action with straight options. The extra cash is a bonus! Good idea! Land_Lubber

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