By Andrew,
On April 4th I wrote a post on implementing the deep-in-the-money calls strategy with Microsoft calls. To recap I bought 10 of the July 2008 $24.00 calls for $5.15 on March 26th. Sometime last week the July calls reached our target of $6.15 and the good-till-canceled limit order executed to lock in our $1000 gain. This means that in three weeks we made nearly 20% by carefully implementing the deep-in-the-money calls strategy. The best part of this is that in the same time frame the stock price moved less than 2%. A great example of the leverage of options.
So lets try and repeat this success. Corning Inc. makes the specialty glassware that goes into LCD screens and has a new technology for bendable fibre optic cable for fibre-to-the-home internet connections. They are cheap on a valuation basis, trading at 19x trailing and 13.5x forward earnings. The have been trading fairly flat for the past year but, based on the fundamentals and the company’s performance, could be due for a breakout. The stock is currently trading at $25.73. Looking out to the August 2008 calls will give us four months to get the required move in the stock. The August 2008 $20 calls (GLWHD.X) at a current cost of $5.91 per share fit the bill for this strategy (strike price $20 + option premium $5.91 - stock price $25.73 = $0.18; which is well under our threshold of $1.00). Therefore, we will place a limit order to purchase 10 of the August 2008 $20 calls at a cost of $5.91 per share. Once the order fills we will immediately place a good-till-canceled limit order to sell the calls $1.00 above our purchase price (~$6.91). This will insure that if we get the required move in the stock price our gains will be locked in.
Once again I will keep you posted on the progress.
3 responses so far ↓
1 Jeffrey McLarty // Apr 23, 2008 at 10:04 am
Okay okay, I got to tell you guys some stuff. In my humble opinion, I can save you a ton of grief (and money) by enlightening you through the benefit of my experience and (3 years of derivative trading) hindsight. The thought of getting 20% x 20% x 20% will make any investor gitty - and turn them stupid. Don’t fall for the trap. The problem with your strategy is you’ll use it, it will work, you’ll rake in the dough and your trades will look something like this: 20% x 20% x 20% x 20% x (until you make a bad call) then you get a x -95% multiplier…do the compounding math (it hurts). You’d be far better off to short puts, or at least sell the front month call if you MUST go long any sort of call or leap.
For some reason, all rookies, need to need to buy the calls - and get burned - in order to learn. I had the benefit of my father enlightening me (an ex-derivatives trader back in the 80’s and 90’s) during the period when me and my naive four friends were learning about options. We thought we were going to retire, we all raked in a few +50% returns, dirt easy. But then, for some reason I chose to listen to my dad and stop. And to thier avail, one by one, my friends lost a ton of cash and one by one either cashed out (with less than they started with, or were completely wiped out. I’m talking - nothing to withdraw) Now, I’m the only one without a complete sour taste in my mouth regarding derivatives. I can use them effectively to add +15% ~ +20% a year to any stock position I hold. The only reason I’m still in the game is without a doubt, I was the first to give up on the “go long plain vanilla” strategy.
But, by all means, prove me wrong…and keep raking in the quick 20% gains.
2 Andrew // Apr 25, 2008 at 7:08 pm
Thanks for the feedback Jeff. It’s always good to get an opinion from people who have real world experience in these strategies. I thought something was too good to be true there. Fortunately I’ve been working this strategy with paper trading so if I pick a stinker it doesn’t really matter. Better to make your mistakes with fake money.
3 Another Deep-in-the-Money Calls Success // Jun 25, 2008 at 8:19 am
[…] strategy that I explain in a recent post through my paper trading account at Investopedia. On April 22nd I outlined our first success with Microsoft calls and a second idea with Corning Inc. With the stock trading at $25.73 I bought […]
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