Replies to post #143 on OPTIONS TRADING

[VERYLONGSTOPPEDDRINKINGTHEKOOLAID]

Aussie, I agree with your logic.

If we get too close to expiration date, even if your stock should stay at exactly the same price each day for several consecutive days, your option value could increasingly deteriorate based on time alone. This is why it is always best to take your profits as you reach them, rather than hold out for greater profits only to see your gains wither away sometimes even faster than you achieved them. Buying a call very close to expiration, even days before expiration can be a very CHEAP purchase and worth the risk if you expect great earnings or a significant announcement in a contract, FDA approval or whatever. Often though, I choose to use a straddle position when something could really move a stock way up or way down in a very short period of time. Here is a case in point....

What if stock XYZ is having a legal courtroom battle with another company and if they win the case the expectation is that it could go from $20 to $30+ in stock price, but a loss could trigger it to fall from $20 to $10 or less, expected to happen prior to an expiration month of an optionable stock? Well, surely a $10+ move in EITHER direction could be HUGE for a call or put option. In this case, I would buy a straddle position, equal numbers of out-of-the-money puts as out-of-the-money calls. Out-of-the-money because the price will be cheap, both puts AND calls because a $10 move could mean several hundred percentage point gains in either direction for a minimal cost. Say for example that the current date is May 15, 2007 and the options expire on May 18th and you buy 100 puts for the May 15's and 100 calls for the May 25's.Imagine if the stock goes to $3 how much you will make! The gains will greatly outweigh the cost of the straddle. The ONLY time this is a bad bet is when the outcome results in the stock neither going any higher or lower.

Looking back, for me, it was SMARTER to have bought the May 45's at $0.30 last week (since it popped to a HOD of $1.10 today, over 3x my investment) rather than to have bought the May 40's at $1.70, going just to $3.10, a less percentage gain....Well, hindsight is always 20:20, but that's because I wasn't sure we would see $41+ today, I expected just $40 before earnings. Anyway, I sold my May 40's got $1.40 profit ($2,800 profit on 20 calls) and then bought 20 May 45's at $0.80 and 3 May 45's at $0.55 today. If I am lucky and I made the right decision, PMTI will have GREAT earnings and we will go higher at the opening. Fingers crossed here! GLTY...