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Strategies & Market Trends : Options -- Ignore unavailable to you. Want to Upgrade?

To: KY who wrote (5251)	3/19/2000 2:52:00 PM
From: Seldom_Blue	Respond to of 8096

Like your idea for in the money options. Why not go for Jan 01 130's? Paying a bit less for time value. Jan01 130 price is $39. Current stock price is $139. You are paying $30 for time value, which is higher than the $24 for Jan01 120. The deeper in the money, the less time value you have to pay. But of course the premium is higher also. I do not view the spreads as a risky strategy, as long as you know EXACTLY what your exposure is and how much money you can lose. It will usually reduce the amount of money you have to pay at first. This feature of the spreads can cause people to have a higher level of commitment than they would for a stock, hence higher risk. Example: You have $60,000 to invest. Using QCOM as an example, you can buy 430 shares of stocks. I am just using round numbers here. If the stock drops 20%, you will lose 20%, or $12,000 dollars. Now you are playing options. If you use the same spread strategy, and bought 20 contracts of Jan01 120s and sold 20 contracts of July 160s, you have spent $56,000. If QCOM drops 20% to $111 and stay there, your July 160s will be worthless, but your LEAP will also drop significantly. It now trades only on time value. There is no intrinsic value. When I calculate the value of my option, I never count on time value unless it is way out of money. So by my calculation, you have almost lost the entire $56,000 of your investment. This is the danger of leverage. If your option goes against you, you could lose a lot more than just investing in common. Another point, if QCOM drops 20% and stays at $111, you can hold your stock and hope it will rebound, maybe next year. With option you do not have that luxury. Of course 9 month (from now until Jan) is a long time, but you have to know the worst case scenario. I hope I did not scare you. I am a believer in QCOM's long term potential, so I hold QCOM's Jan02 50s and 90s. I am not writing any calls against them yet. If QCOM runs up to 150 level, I may do some July calls. Seldom Blue

To: KY who wrote (5251)	3/19/2000 2:59:00 PM
From: Seldom_Blue	Respond to of 8096

When I started trading options a while back, I used this rule: I would look at a stock and ask myself if I were to buy the stock in stead of the calls, how many hundred shares of stock I would buy. Then I buy that many contracts. I started buying two or three contracts of calls and selling two or three contracts of puts. After I got a feel for what I am doing, I started increasing the size of the trades. Other people with more experience may also have a rule they follow. SB