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

To: Vol who wrote (102)	8/3/1998 4:31:00 AM
From: Don Martini	Read Replies (2) \| Respond to of 355

Hi, Volunteer! Selling straddles brings two risks: The stock you were discussing has a straddle premium paying 45% to the writer on a $25.00 strike. Most stocks don't win or lose 45% in 6 months, particularly if the chart shows a consistent trading range. 1. If the stock dies suddenly you may end up with a lot of Burnt Turkey, but then you can sell calls to recover, unless it acts like APM [Applied Magnetics] which was as high as 58, is now 5. In such a case the call premiums may be too small for you to recapture much. With the stock you were discussing the strike was low enough and the straddle premium high enough to provide lots of comfort. My worst case was Vivus, sold 15 $35.00 puts for $8, then it dropped to $11.00. Lost $25,000. Very bad technique, should have watched it better. I'd just made some money with Vivus and thot I was bulletproof. 2. The risk of a stock that goes out of sight and leaves you covering expensive shorts is real with a stock like Yahoo, but not much with a low-beta security. [One that doesn't move more quickly than the market] I sell Puts for a living on hot stocks like Dell. Am short 50 right now, down from 120 two weeks ago. I prefer to buy calls as I never want to be short when these stocks go on a run. Strategy: I sell Puts at-the-money or up to $10 higher than current market, going out 4-6 weeks. Usually the stock goes up, so I'll divest myself of the contracts when their value is about half the original premium. Made 70K in July this way. I'm short 9/110&120 Dell puts. They announce earnings on the 18th and if the market isn't dead the stock will climb. If Dell drops I'll roll the puts out and down into leaps, reduce my liability and maintenance fees by $20 or so and take in more money because the premiums will be higher. The leaps will be a bridge to get across the valley. My son just sells Leaps to begin with and waits them out. Sold 10 Dell Leaps last year for $38 that he just bought back for 50 cents. Is short a bunch more, all in-the-money. Fortunately he has enough muscle to buy the stock. Eventually Dell will recover, the leaps will depreciate and I'll take my winnings. I've never had leaps assigned to me, they cost the other side so much that they just hold on for a better return. A more cautious play is to sell puts $5-10 under the market price a few weeks out and keep all the money. Hope this helps a bit, Volunteer!