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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (79956)	4/21/2000 5:33:00 PM
From: Knighty Tin	Read Replies (3) \| Respond to of 132070

Wayne, I look at B/S, which is a good description of the model, but don't give it a lot of weight. Where B/S has some use is in comparing various options you want to buy or sell in the same stock. But even then, the input variables are so subjective as to render the model all but useless, as Long Term Capital finally discovered last year. Fortunately, their Friends at the Fed, FF, model, worked much better. <g> Premiums have been fat for the past year. This is especially so with Leaps. You have to give it a lot of caveats, but I don't think most buy stock strategies will beat a deep in the money Leap bull spread on a quality issue right now. There are two ways to use them. First, pick a relatively cheap company that has fat leaps, which is not as easy as it sounds. Then, you buy a deep in the money call with relatively little time premium in it. For example, a stock may be at $100 and you buy an $80 strike price call. Then you sell the at the money, the pars, in the same expiration date. And, to be conservative, you hold the $80 per share in cash during the interim (though 2 year notes with a 2 year Leap would certainly be conservative enough). This sort of strategy will pay you about 20-30% a year right now and, since the market averages less than 10% a year, I will take my money up front, thank you. <g> The other way to do it is with put credit spreads, which I've been doing lately. Obviously, the key to this is the two relatively measurements. Is your stock really relatively cheap and relatively how little time premium are you buying in your long position. One saving grace is that if you are wrong quickly, your long call loses intrinsic value, but it quickly picks up beaucoup time premium.