Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Tim Lumley who wrote (121)	8/7/1998 9:02:00 PM
From: Don Martini	Read Replies (2) \| Respond to of 355

Tim, My protection against sharp downturns is the rollout. Four benefits: 1. Larger premium, reducing break-even point 2. Delays day of reckoning, giving time for stock to recover. 3. Opportunity to roll down to lower strike price 4. Potential to repeat rollout again & again Example: Suppose I sold 10 Dell 8/130P on 7/17 for $16. The premium is now 21.00; I'm $5 under water. What to do? Buy the 8/130P back for a 1998 loss, then sell my choice of: 2/99/130P for $31 [$10 gain] 2,000/130P for $38.50 [$17.50 gain] 2001/130P for $44.12 [$23.50 gain] Only 5 2001/130P cover the $21 buyback, and there's still a small gain. Or, roll out and down and fewer: Sell eight 2,001/110P for $28.50. 3 benefits: lower strike, fewer contracts, 28 months time distance. Suppose Dell's troubles are temporary, it climbs to $150 by December: Premium for 2001/110P which I sold for $28.50 will be about half. I can buy those back and sell a closer put for a higher premium, reduce the wait till I'm in the clear: a rollback & up. Of course there are numberless other combinations, Tim. Let's suppose the 8/130s are put to me when Dell is 115 next week. Now I can really get fat: My net cost on the stock is $130 less the original $16, or $114 Then I can sell the 2001/130 straddle for about $79. Net out of pocket is $114-79 = $35. Assume the stock is called in 28 months at $130. Profit is $95, which is about $115% annualized gain: total gain 271%. In the meantime, as the stock went up I close out cheap puts and sell ones with higher premiums to eliminate the $35 cost. My problem is: will Dell go up in 28 months? I'll accept that risk. In the last 28 months Dell went up 3,600% Hope this helps, Tim Don Martini