McMillan's Strategies

Discussion in 'Options' started by JS11374, Dec 12, 2001.

  1. #31     Jan 17, 2002
  2. ktm


    It looks like each of those scenarios would give you a loss if the stock collapsed and you held on.

    Fundamentally, EK is in bad shape. Their margins are eroding and according to most analysts, the digital photo business is going to kill them. Based on that and some further fundamental analysis, I would say the feeling is that the stock will tank hard over the next few months.

    Personally, I'd short here (26.75), then write 2 Feb 30Cs (.45) and Sell a Feb 25P (1.00). Below 25, you make 13.6% (minus comm) in a month. Between 25 and 30, you're short with a basis of $28.65 and above 30 you'd be averaging up or buying back. It would need a big run to the upside to make it above 30. I would hold a "typical" Dow stock long as a hedge...that is one that would beat the DJIA upward in a move that would bring EK above 30.

    Of course my scenario would give you a big loss if the stock launched, but that's not the way the opts are priced right now.

    Just my .02
    #32     Jan 17, 2002
  3. Another 2 cents worth. Buy EK stock, buy the equal number of feb 30 puts, offered at 4.20, risking less than 2%, $450 plus commissions every 1000 shares. If EK brakes down below support sell your shares, in effect going short with no uptick rule, buy them back lower to deliver to your put, or if they go low enough put on second position using the 25 puts.

    If EK goes up, say to its 50day MA, write the 30 calls against your shares at around $1.50 if vol and time permit, or sell the stock and with some of the profit buy the 30 or 35 calls if you feel it would go higher while keeping your puts if it doesn't.

    This is low risk, but can be low reward. You're always hedged and while you're sleeping the Enron illness can't get you, and if you're nimble can return what a good spread would...........Pat
    #33     Jan 20, 2002
  4. There is a problem with trading high implieds on cheap($) stocks. Although the implieds look fantastic -- the vols are too cheap in absolute terms -- implying a huge gamma risk. Additionally, the implieds at the bid and offer vary DRASTICALLY. You can easily buy 100IV at the offer and sell 50IV at the bid. Something to keep in mind...


    12-13-01 03:33 AM

    McMillan has some good points. There is much to be said about option volatility for no apparent reason (rumors). A portion of my trading is based on that very same premise.

    A good example these days is SONS. They were rumored to be a takeover target in early November before they started to move up. Even when the stock was relatively flat, the options were VERY expensive. In these cases, it doesn't matter whether they get bought or not as you can make so much from selling the premium. This is a wonderful game to be sure.
    #34     Jan 23, 2002
  5. ktm


    Most of the time, I will sell at the ask or at worse split the bid/ask. I don't pay as much attention to the greeks per se. At $5, all I want is a company that is not going out of business any time soon. I will buy an inital stake, then sell calls and puts as long as it continues to lower my basis. I am constantly averaging down but never up. I can usually score 25-30% within 3-4 months from all the writing.

    $5 is usually risky because there's generally nothing below to write, although they recently rolled out 2.5s on SONS. I was very surprised. I have been in and out of the stock several times in the past few months, each with better than 20% profit. I am in again but probably playing it for the last time as I'm getting nervous about the fundamentals.

    Thanks for the advice.
    #35     Jan 23, 2002