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

To: Joe Waynick who wrote (50)	7/19/1998 12:19:00 PM
From: grenouille	Read Replies (2) \| Respond to of 355

Joe, Funny you should mention DELL. On 5/18 I did a buy/write for 200 sh of DELL @ 92 « and 2 June 90 calls @ 9 1/8. On 6/10 I was able to buy back my calls @ $1. I felt so smart - now my DELL only cost me $84.79/sh - and it was mine, all mine! On 6/22 I wrote 2 July 85 calls @ 6 3/8, dropping my cost to $78.56/sh. Then DELL started to wake up. The stock took off like a rocket. I watched the calls I wrote at 6 3/8 move further and further into the money, becoming more and more valuable, until near expiration they were in the $20's with stock @ $100+. It was painful for me to think I'd have to give up my 200 shares of DELL for a measly $85/sh when the market was well over $100. So, on 7/14 I bought back my July 85's @ 24 ¬, and rolled up and out to Nov. 90's @ 25 ¬, thus pushing the day of reckoning forward - and, at a slight credit. I felt MUCH better. Now that expiration has passed and the sense of urgency and emotional reactions that come from watching the stock movement and the ticking clock have subsided, I am beginning to see how dumb I am. First, I have learned from the "Case Study" thread (Herman, Steve) that it is better to leg into a position than to execute a buy/write. A buy/write never gives you the best of both sides of the trade. I wasn't aware of this thread on 5/18, and was following a buy/write strategy from McMillan's book. Nonetheless, the position had the potential of 7.6% profit in one month if called, or 91.2% annualized. Not bad. Buying back the calls for a buck - of itself - was OK, but a subtle change was occurring unnoticed in my brain (now my DELL cost was still only $84.79/sh - and it was MINE, ALL MINE!!). Selling the July 85's @ 6 3/8, lowered my cost to $78.56/sh., but changed my potential profit to 7.7% for 2 months (only 46.2% annualized). This was not smart. I should have waited for a better opportunity (which subsequently did develop as the stock took off). Rolling the July 85's to Nov 90's, while generating a small credit, only lowered my cost per share to $77.85, and set my profit if called to 14.5% for 6 months (29% annualized). Again, dumb move. I'd have been better off letting the shares (worth $117 5/8 at Friday's close!!) go @ $85. The purpose of this lengthy post is to thoroughly rub my nose in my errors and to show others how easy it is to lose one's objectivity as a CC position matures in a dynamic market. In the future, I run the numbers - THEN do the trade. Thanks for your patience. -Bob W

To: Joe Waynick who wrote (50)	7/25/1998 9:43:00 AM
From: Joe Waynick	Read Replies (8) \| Respond to of 355

Reduced-Risk Trading The following is from the book Options Essential Concepts and Trading Strategies, second edition. It's published by The Options Institute: The Educational Division of the CBOE. The book can be found in most bookstores. I got my copy at Amazon for a 30% discount. The author of this chapter Harrison Roth also wrote LEAPS, another excellent book. Greg Higgins recommended both books on post #1 of this thread. Here's the quote: Reduced-Risk Trading For the scalpers and market pinpoint-timers, there is a wonderful option strategy available. Start by buying a combination - equal quantities of puts and calls on the same underlying stock, with the same expiration month, but with different strikes. These will usually consist of a call strike above the market price of the stock and a put with a strike price below it. This technique is well known: traders use it to profit from a large stock move in either direction. The strategy can also be employed in a slightly different fashion. Assume that after your double purchase, the stock moves down to below the put strike and then hesitates. If you believe it is about to turn up, you could buy stock at that point. If your assumption is correct, you could sell the stock at a point when you thought it would again reverse its trend. If you were wrong, the risk was limited because you could always exercise the put. Similarly, if the stock first rose, you could short it, then buy it back while being protected by the long call. If you are able to get off a couple of good trades, you will probably recover the original cost of the combination. Once that has happened you will be in the stance of having no money invested, and being able to trade back and forth while always being protected. I modified this strategy by purchasing a straddle on ONSL, instead of a combination and trading the 24.50 - 28.50 ranges. According to the book, the combination would have been $30 call, and $25 put. But the maximum profit range with ONSL is $28.50 at the top, so I settled for the straddle at a higher cost. I opened the position at the low end of the trading range on 07/14/1998. It has since climbed to 29.00 and my position was reversed, now it's heading back down. I'll need three trades to get a risk free position. Then it's blue-sky profits all the way! Here are the numbers: Bought 1000 shares @: 24.50 Bought 10 Dec 25 call: 4.75 Bought 10 Dec 25 put: 7.00 Long roll range: 24.50 - 28.50 (4.00 per roll) Short roll range: 28.50 - 24.50 (4.00 per roll) If this stock repeats the channeling pattern of the past two months, I should generate about $16k per month. Once it breaks out of it's channel, the max loss I can incur before closing the position will probably be around $5k. That still leaves $27k on the table -- more than double my investment in only two months! Of course, the stock can continue to roll right through December, in which case I shutter to think about the potential profits. The big risk: the stock breaks the channel to the downside immediately after I enter the position. That would be a $9k loss on immediate breakout, (it hasn't), a $5k loss if the breakout happens after two trades, and ZERO RISK after three trades! I'm also playing with a further modification to this strategy that will let me juice this baby even more, but I'm not ready to share it until I've thought it through and back-tested the idea. If it works out, then I can be risk free after only one trade, maybe two. If anyone is interested in how this play works out for me, post to the thread and I'll be happy to share the results with the gang.