A.I.M. Users Bulletin Board

[SFSecurity]

Hi AIMStudent, We're all still learning how do things given the changing market and other things we can't see in advance.

A classic example is what happened to me in September last year. GERN had a medical product that looked interesting and they were being backed by Abbott Labs so I thought that it might be a good position to build up. First I sold a $4 PUT for 10 contracts. It got assigned for a net cost, after subtracting the income from the PUT and commissions, of $3,627.67. But it was above the price because GERN crashed when Abbott canceled their contract. Ackk!

I looked at the various options and decided I needed to lower my costs per share to get anywhere so I bought another 5,000 shares at $1.735 per share average, bringing my cost per share down to $1.95251. I then sold a $2.50 CALL for 60 contracts for a net of $224.04 which brought my total cost of this disaster down to $$1.91516/share, a total of $11,491, about two thirds of what I had planned for the position when I would start AIMing.

That call expired with no assignment. I bought a bunch more shares to bring my cost per share down to $1.793006 so I sold a bunch of $2 CALLs for a net of $1,447.40. I'm not sure why I did it but when the options went down I bought to close them for a cost of $177.39, a net income of $1,270.01, reducing my cost per share to $1.666062, almost exactly what it was selling for back in December.

So then I sold another $2 set of CALLs for a net of $423.40 so cost per share now of $1.623722, almost what I had planned for AIMing. I was concerned it might drop some more so I had chosen a long time frame CALL, a big mistake, that won't expire before June 21st. It looks like GERN might be called away as the price per share is up in the $1.90 range. Who knows.

If it expires without it being called away I'll be in a good position to sell a bunch as the current price will be up about 15% over costs. I'll sell about 400 shares and sell a few CALL contracts as well. I might sell some PUTs as well to reduce my cost per share some more, this depends on the likelihood - totally a guess for sure - of whether it might drop big time. If it might, I won't do it.

This is an example of how using options has helped me avoid a disaster.