One Lump, Not Two
Ok, so we won the battle and lost the war. The CSCO call
was right on (at least from when I wrote the piece at the open) and the
spread made a little money. But not as much as if we had just laid into some of
the Jan 35 puts (they could have been sold at $3 and would have made you a buck
or even two in the process) or grabbed some of the Jan 37 1/2 calls (worst case
from my posting this column, you could have made a bit more than $1 by day’s end
yesterday). But what if we were wrong and what if you hadn’t been expecting to
exit this soon? CSCO was up the most percentage-wise of the 150+ stocks I
have on my montage, but I was thinking of riding this into Jan. expiry. It’s only
28 days.
Our bull spread did little better than 5/8 while the
stock moved $4 or better than 10%. Heck, why mess
with options, right?
Well, I was looking at all “Red”
on my monitor when we posted yesterday morning, and it could have stayed that way
all day. In fact, if it had gone lower, your spread wouldn’t have cost you but a
1/4…the risk/reward comfort level we are trying to find. If you wanted to
only risk a grand (multiply out for your incremental increases) and you bought
1000 shares, you would have made four grand if you exit right now, but you
would’ve been out on the first dollar down-tick if we had been wrong.
With this
strategy, you could have purchased nine spreads,
stayed in for 29 days, come hell or high water, and with yesterday’s move made
$600…today’s action is bringing in a bit more. If CSCO sits here or higher
through the expiry, you’ll have doubled your dough. Have 10 or 20 of these
strategies going at the same time, and you’re leveraged nicely with the same raw
exposure being long (or short) the underlying stock. Here’s what the public is
doing today:
Pre-open order volume
was light today. In the overall market, call sellers and buyers were even at
1:1. Put buyers and sellers follow suit. The top five pre-bell order volume
leaders today are as follows: CSCO, AOL, INTC, JDSU and MSFT. IBM put sellers
outpaced buyers 6:1. INTC call
sellers lead buyers 2:1, and put sellers lead buyers 3:1.
MSFT call sellers outpace buyers 2:1.
F put buyers dominate.
First-hour order volume
remained light. Overall, call sellers outnumber buyers 2:1 while put buyers and
sellers are even at 1:1. The top five first-hour volume leaders are: CSCO, MSFT,
EMC, INTC and JNPR. AMAT call buyers led sellers 7:4. IBM put
buyers outpace sellers 2:1, call sellers outgun
buyers 8:3. AOL put sellers led buyers 2:1, and call sellers led buyers by
the same ratio. WCOM put sellers dominate, while call sellers led buyers
5:3. SDLI put sellers led buyers 2:1, while call sellers beat out buyers
3:2..
One of the names we got you into a couple weeks ago was
Extreme Networks (EXTR). The bull spread worked well as the stock ran from $57
to over $85. Now the stock, which was caught in the TERN news earlier this week,
is hovering around $35, which is half its price of a week ago. The Jan 50/55
call spread can be had for under $1. A move back to Monday’s prices will yield
at least a “double.” You could even sell twice as many Jan 65/70 spreads on top
of this to get your money off the table, and you have no exposure unless the
stock trades over $67 at expiry. This would be a somewhat advanced strategy, but
an interesting one in a mover.
We’ve been getting some
e-mail regarding your questions on options; The rest of you should check in. While I have a bit of
“bandwidth,” I’ll
try to get to them over the holidays. Stay warm and stay spread. Merry
Christmas.