I believe that your recommendation strategies below are for both for buying stocks and options. I only know how to buy stocks. I didn't seem to able to distinguish your advice from stocks to options. Can you help me out here? Thanks. (September 9, 2000)
Our strategies refer to both stock and option buys. You can do one, the other or both. When we say a buy point on a bullish play is at a certain price, that refers to the stock price. That buy point is used for stock buys as well as option buys as option value is derivative of the stock. In other words, when a stock breaks out of a pattern, that is the time that we look to buy the options as well as what is good for the stock is good for the options. We like to buy options to leverage buying power, but we also really like buying stock as you don't have to worry as much about time decay. That can lull you into a false sense of security, however, as you can get lax on your stop loss points thinking 'I can ride this as long as it takes to turn around.' Well, sometimes stocks don't turn around. Better to get out of a loser with a 7% to 8% loss and put your money to work on a winner than ride a loser down 50% or more, losing both money and opportunity cost of a better investment while forced to hold onto the flagging stock.
Speaking of options, this brings us to another point. We have been closing out September positions the past few weeks, and October as well except on our shortest term momentum plays. Next Friday is the September expiration, and September options will be losing value in a hurry. October options will get a pretty good knock after this Friday as well as they enter their expiration period.
Another consideration on taking option positions. When looking at longer term option positions as we do, e.g., December and January, there may not be a lot of open interests. The majority of option traders speculate with short term, out of the money options. When you do that, you are setting yourself up to fail if you do not have a very definite plan. That is why there are always more open interests in the near term, at the money options. On our short term plays such as pre-splits, we like to have 500 open interests if we can as we need liquidity in the option to be able to move out of them in a hurry if need be. On our the longer term positions, however, that is not always possible as the majority of option players don't invest; they speculate, hoping to hit the home run. On our long term positions, however, we are not under that short term volatility as much. The most volatile options are near term, at the money options. Longer term in the money options are not as volatile, and that helps as we don't have to worry as much about huge moves in a short time. We just have to realize we may not get the great in the spread trade we want. But, if we got a good entry point and the stock performed as we wanted, getting another one-eighth on the sale is not as critical.
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