To: Uncle Frank who wrote (8109 ) 10/12/1999 1:24:00 AM From: Thomas Tam Read Replies (3) | Respond to
UF, with any calls/LEAPS, your return on investment is based on a much smaller chunk of capital. Therefore the percentages can be huge but the absolute return would be roughly the same. In a stock running up like Q, buying any call will probably make you money provided you have enough time for the option to go up and the time premium paid is not too much. The power of LEVERAGE. Buying options or stocks directly on margin exploit leverage, however with call options your maximum loss is only what you paid for the option, therefore the risk is reduced in calls/LEAPS. I look at calls/leaps as a method in owning stock at a fraction of the price until expiration and am not looking to selling the call after appreciation. I usually exercise the option as I want the stock. Selling the calls would only generate taxable income for myself at a time when I don't really need it. The strategy I use to add to my position is waiting for any type of reasonable decline (10-20%) as an entry to go long calls/LEAPS or short puts. Sometimes a combination of the two strategies. Both have a bullish tendency.
