Full Disclosure Finance

By Andrew,

Lately I have been trying to implement the deep-in-the-money calls options 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 10 of the August $20 calls for a premium of $5.91 per share for a total capital investment of $5910. Sometime last week the premium on the calls hit our target of $6.91 per share and the position was sold for a gain of $1000. Good for 17% in less than two weeks. The move was thanks to a solid earnings report by Corning where both earnings and revenue saw strong double digit growth. In addition, guidance was raised for the upcoming quarter and full year. In the same time-span the stock price increased approximately 5%, again illustrating the leverage of options.

In a comment on the previous post Jeff from Blue Moat illustrated a potential downfall of this strategy. Essentially his point was, the strategy is great when it works but if you pick a bad stock you can end up down 95%. The leverage of options is great when it works for you but when it goes the other way it can translate into serious losses. One way to get around this may be to put in a stop loss order after the calls are purchased. In the same way we limit our gains to $1000 we can limit our losses to $1000 as well. As long as you are smart about your stock picks you should be able to stay on the winning end of the trade the majority of the time. Stay tuned for more potential stock ideas for this strategy.