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Strategies & Market Trends : Gersh's Option trades -- Ignore unavailable to you. Want to Upgrade?

To: kaka who wrote (601)	10/14/2005 5:50:49 PM
From: Joe Waynick	Read Replies (2) \| Respond to of 652

Kaka – I’m not a market timer, I accumulate stocks with OPM "Unless a stock specific even drives the stock price way down, then you're assigned and even Leaps will not bring in enough premium to give you a 25-50% return. If you bring down the strike, you run risk of assignment at lower price than purchase. Then you lose on your original shares and the new shares. If your original intent is a directional play (up) why limit the upside with CC's? If your sentiment is neutral, why buy the stock outright to sell calls?" Your comments above are understandably true enough. However, for the sake of brevity, I assumed readers saw my previous posts and understood how/why I would open this position. However, a little more detail seems appropriate. First, I wouldn’t implement this particular strategy unless I don’t mind owning the stock long term. It must currently be selling at least at a 25% discount to its intrinsic value (thus severely limiting its downside), be at its 52-week low (giving further downside support), demonstrated 10+ years of consistent profitability at 15% or more ROE, show little debt, and declining outstanding shares in eight out of the last 10 years and five out of the last five years. All of these factors make your worst-case scenario unlikely – but not impossible. If the stock goes up, then wonderful. I make a decent short-term profit and move on. If it goes down, that’s wonderful too. I accumulate a position in what I believe is a fantastic company (that I don’t believe will go out of business) at bargain prices and wait for the market to recognize the discount to intrinsic value and adjust the stock price upward. I would never sell CC’s below my cost basis. ATM LEAPS can go out 2.5 years and provide a great deal of time value premium that will give me a decent return. I like to keep things simple. The above strategy works very well for me. I’ve accumulated a nice portfolio using the same money over and over and letting OPM build my retirement. Having said that, I must admit ignorance about “put verticals”. Can you educate me? Joe