Tom, First, congratulations on the strategy working for you. Since you asked for the negatives, here goes. Assuming $100,000 to work with why buy 2,000 sh. at $50 when you could buy 50 calls at $20 and get 2 1/2 the leverage? As long as you are correct on the direction, it's great. But, no one can pick winners all the time and all to often aggressive strategies are used until they blow up. Who wants to walk away from margin or options, when the leverage they give yield such spectacular returns? Lets say the stock next time has a similar profile that which SFE had [price and option wise]. Strategy A. buy 2000 sh. @$50 for $100,000. Strategy B. buy 50 of the 30 strike calls for $20 =$100,000. Now this stock heads south big time and goes to $30 at expiration. In strategy A the value would be 2,000 sh. at $30 = $60,000 with unlimited time to recover. Strategy B. 50 calls worth $0, the $100,000 is gone period. Now, this is not news I'm sure, but what tends to happen is that what started out as a limited enterprise, has a way of growing into larger bets as assets build. A very imperfect analogy is it is something like double or nothing until it blows up. Margin and options are useful tools, but very specialized tools that should be brought out from the toolbag and used only in special circumstances. Because of the joy they bring when they succeed, the tend to be overused, until the leverage [excluding covered calls, or puts for protection] bites in a very big way. Now, I realize, one could put a stop on the calls and it would be near insanity to let them go to zero, and there are other buts, however, the general criticism holds. It is like having a tame lion. He may go for a long time just seeming like an overgrown furry friend, but inside, there is a major disaster just waiting to undo months and maybe years of "friendship" in short order. [Especially relating to buying calls, puts, or selling each naked]. One last point, right now to roll out, the Aug. $70 calls to buy are $29 3/4 with the stock at around $91. That is like paying $99 3/4 for SFE, a 9.6% premium for 3 mo. or 38% annualized. Even in the money calls usually carry a significant premium. The fact that you got yours for almost no premium indicated widespread disbelief at the time and is a definite contrary indicator, [the stock may have considerable upside]. The fact that the premium is now this high, is an indication of belief and reflection of recent volatility, a possible contrary indicator the other way]. Now don't come back with any Ya Buts, and don't push your luck with these things OK? , <g> Mike
PS. These are fun to answer, but a bit time consuming, will phase out the option Q and A on options at least for awhile, thanks, M |
