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Technology Stocks : Internet Analysis - Discussion -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (144)	2/8/1999 1:28:00 PM
From: Joe E.	Respond to of 419

"But I'd like to come back to the issue of the internet stocks in this connection. If you look at threads like AOL you will find that many investors are momentum guys. I suspect that if you did a careful study of the behavior of such stocks you would come up with the following results: a very high beta (and implied volatility), and a negative alpha. If this is the case does it make sense to buy these stocks and sell out of the money calls against your position? " For whom, fundamentalists like you, or Zen traders like Cosmo, or the momentum guys? What makes sense to me is buying grossly undervalued stocks and selling grossly overvalued stocks, and timing those buys and sells to avoid the momentum herd. I usually sell call options when I am ready to sell and want an extra half point or so (even then it doesn't necessarily work). The bid-ask spread on most out-of-the-money options is enough to make you puke. Sometimes I will sell call options on stocks I own that have spurted to the top of their trading range for no particular reason, expecting to buy the options back within a couple of days as the stocks sinks back into its regular trading pattern. This doesn't necessarily work either, but is satisfying when it does (best done when a sale will not trigger a short term gain tax). The problem with doing a buy-write with a stock you consider is fairly valued is this, IMO. You buy the stock at $100, and sell a call for lets say $1 a month out at a strike of $110. This looks great, you can make 1% a month, and only get taken out if the stock advances $10. Rarely this happens, and you make $11. Sometimes you make the $1. But other times the stock sinks to $85. If you sell calls on the stock at $85, to get $1 for the call, you have to sell at say a $95 strike price. If the stock gets back up to $95 and gets called, you just locked in a loss on your original position. So instead you wait and don't sell any calls until the stock goes up. So now you are making 0% per month on your call selling program, and at the end of the year after doing this program on 100 stocks, you will find that you were only able to sell calls maybe 5 months on average for each stock, thus making maybe 5% on the calls. None of your stock holdings will be 10% above your entry price, but some will be more than 10% below. I think this system locks you out of the huge leaps possible with these high volatility stocks and locks you into the huge drops possible. If you had a huge pot of money and played this game you would probably make the risk-free rate of return less your commissions. Once in a while, if you have followed a company very closely for a long time, you will find the options mispriced, usually due to an industry event. This is a good time to try to come up with an options play.