To The Thread
I see there's been a discussion on the use of options. I'll throw my 2cents in here, well 4cents anyway as it's been a very good year.<g>
The true use of options as a buyer is for leverage. If the stock is at 50 and you want to own it say using 1000 shares then you have to spend $50K to do it. If the stocks chart, the sector it's in, and indexs are all moving "say" up and you wish to buy calls instead of stock, you would buy the IN THE MONEYS only.. that would be the 45's and go out 3 months to do it. Safety is in time.
The truth is that 80% of all OUT OF THE MONEY OPTIONS EXPIRE WORTHLESS, meaning if you bought the 55's you "could" lose all your money. So never buy OTM options ever! and always buy ITM options either puts or calls.
Next is having an exit strategy. As a general rule of thumb, if you can get a quick 50% profit on an option trade, either sell 1/2 and get your original capital investment back and let the other 1/2 ride a bit longer, or sell it all and smile all the way to the bank. 100% trades do happen but not with regularity. I say take the money and run. Greed is the single most destructive force of an option trader's mentality..Getting greedy because your investment was cheap is dead wrong.
Do not be greedy and you'll make money on calls and puts..
Now as for INVESTING using options. I have written about the proper use of buying the stock that's paying a nice dividend, and writing the Jan 2005 Leap calls against that position.
Take MO for example. we traded that when it was under 50..if you buy 1000 shares of MO at X price with the intent of holding it for 1 year to capture that 6% dividend, then to enhance that trade sell the Jan 2005 leap call 1 strike higher about 5 point above your entry. Take in that premium about $3.50ish would be my guess, and now you have about $6500.00 on your money locked..about 14-15%
there are 3 potential scenario's that could happen here..
1. the stock trades "above" the strike you sold it at and the buyer of that call excersies and takes your shares away from you. This is mana from heaven because you get paid a full 5 points higher than your orginal price, hence another $5000 in your pocket. the best of all worlds..and now your up to 22.50% profit on your original investment
2. the price does not get above the strike meanders at the same levels you paid for it so you take in 14-15% on your money for the year, ok not too bad<vbg>
3. The stock declines 10-15% and moves "under" your buy in price. you are protected folks down 6 1/2 points as you've already gotten that cash in your pocket.. not too bad. if you get stopped out of the trade then buy back that option at much cheaper numbers and take a small loss or just hold the whole position and sit tight, if the stock is a solid company.
all in all i would not be afraid to trade options, just use your heads and do not get greedy and always buy ITM options PERIOD!
hope this helps
jerry
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