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Tyco International plc Message Board

  • chartness2003 chartness2003 Dec 19, 2002 2:07 PM Flag

    Personal options transactions today

    1) Bought back 25 Dec. 17 1/2 calls at $10 apiece and sold 25 Jan. 20 calls at $35 apiece. Net proceeds of $515 after commissions

    2) Bought back 10 Dec. 15 puts at $5 each and sold 10 Jan. 15 puts at $75 each. Net proceeds of $620 after commissions.

    Recap of all rollovers from Dec. to January:
    1) Net proceeds of $5,080 after commissions from rollover of call options.

    2) Net proceeds of $980 after commissions from rollover of put options.

    3) Net proceeds of $980 after commissions from originally selling the 5 Dec. 17 1/2 puts at $200 each.

    Total net proceeds of $7,040 after commissions from all options transactions.

    On Dec. 4, I jumped the gun and used the antipated proceeds to buy 200 shares of Tyco at $17.01 and 2 of the 10-strike LEAPS for '05 at $990 each - and sold against them 4 of the Dec. 17 1/2 calls at $95 each. The net cost of these transactions was $5,040. I used the remaining $2,000 to reduce my margin balance.

    The effect of all these transactions has been to reduce my breakeven point from $23.75 to $23.00. I hope to get the breakeven down below $20 by July 4.

    All the best to the longs.

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    • I buy back even ostensibly worthless options for $5 or $10 apiece prior to expiration when I roll. That is because if the stock remains relatively flat, there will be a big difference in premiums for one-month options between, say, the Thursday prior to expiration and the Monday or Tuesday following expiration.

      Most options writers are "penny-wise and pound foolish." They cannot bring themselves to pay the $5 or $10 per contract for expiring worthless options and as a consequence they are forced to wait until after expiration to write the following month's options. Everyone gets into the act the Monday following expiration and premiums drop quite a bit.

      It isn't unusual to see a drop of $15 or $20 a contract when the stock remains flat. If you buy back the expiring calls for $5, you can get that extra $15 or $20 the Thursday before expiration. What matters is the DIFFERENTIAL between the one-month options and the expiring ones. What good is it to save $5 per contract by not buying back "worthless" calls if you are going to receive $15 or $20 less when it comes time to write the one-month calls?

      Of course, if the stock should have a decent rally right after expiration, the strategy is less than optimal. However, I don't play for such rallies myself.

    • Go buy a Wade Cook book...

    • He has been trading options for less than 6 months.

      Jesus christ, what are your standards?

      And if you would follow your so called veterans posts you would know that he always close the option position before expiration and opens new ones (roll outs)as he mistakenly believes he profits from such an action!

    • options, do you normally wait for sold short term calls to expire worthless before selling more or do you buy them back shortly before expiration and then sell more with a later expiration month? I just started selling calls and could use the advice of a veteran.


    • I have to agree with chartness on this one only because when you are buying and selling leaps you are buying or selling time.Because the DELTA is so low (the relationship between the stock price and the option premium)that a couple of points move in the stock price will not have that much effect on the leap premium. That of course is the out of the money leaps.The only concern I have about leap puts is they are more likely to be exercised than calls especially if things get out of hand in Iraq when the thinking will go from accumulation to preservation.Last month I thought chartness was crazy to sell the december calls when we were expecting the audit news, again I was wrong chartness was right.To quote a well known investor all as you have to know is a couple of stocks really well.

    • You will probably outperform me if the stock does not move significantly higher, albeit temporarily. However, if say, come March the stock goes from 18 to 21 because things are perceived to be coming together for Tyc, accompanied by a strong market and a successful war, my profit at that time will be substantial (3-4 points) while you won't be getting that much out of the sharp increase, particularly if you're still at 17.5s. I don't think either strategy is right or wrong. It depends on whether there will be a sharp increase. I'm voting and expecting that there will be. We can both do well.

    • You might want to compare what happens with the monthly puts versus writing LEAPS such as the January '04's. I'll admit that $610 seems awfully attractive on the 20-strikes 13 months out.

      But compare that with what I've done the last couple of months. On November 18 with the stock slightly over $16, I sold the December 17 1/2 puts for $200 each. Yesterday I bought them back for $90 apiece and then wrote the January 17 1/2 puts for $170 apiece.

      So in just two months, I have taken in $280 in proceeds - compared to your $610 per contract for thirteen months. In addition, you have 20-strike options whereas I only need 17 1/2. When my 17 1/2's start expiring worthless, I'll be able to start writing the 20's. If the stock is at, say, $18.50 by January expiration, I should get maybe $225 per contract for selling the Feb. 20's. At that point, I will have received a total of $505 in commissions per contract for only three months - compared with your $610 for thirteen months. By the time I roll to March or April, I will have taken in as much if not more than you got. Only you will have January's with substantial time premiums and I'll have at least as much as $610 already in hand if the stock is $20 in April.

      Good luck to you with your Tyco holdings.

    • Thanks for your response. You apparently concede that your breakeven occurs only when the options expire. I understand that you prefer 1-month options. I sometimes don't. In fact, I wrote 20 Jan 04 puts @ 6.10 this week. My thinking is that it gives me plenty of time for the stock to get to 20, alot of premium which I reinvest in other stocks, and if Tyc spikes at any time, I will close out the position at a substantial gain and probably replace the sum needed to buy the puts back by writing another put, not necessarily a Tyc put. I look at put writing as a matter of cash flow and go with whatever stocks will give me a combination of a fat premium and a reasonable chance for a spike up. My experience has been that trading them every month makes you have to deal with the spread every month which can be expensive. It also makes it impossible to benefit substantially from a large increase because you're not getting alot of time value which would erode if the stock rises quickly. Obviously, sometimes you'll come out ahead with 1 month puts, ( the time value you do get erodes quickly) but I have more often than not done better with longer puts.

    • As others have pointed out, your use of the term "breakeven" is misleading at best. If Tyc hit 23.75 you would not be even because all of your stock would be called at lower prices. Alternatively, looking at things as of today -- the most valid way of doing it -- your short option positions need to be subtracted and thus your cost is much higher than 23.75. Since you demand precision of others and consistently call people on minor errors, it is surprising that for yourself you adopt a self-serving, wholly invalid definition of "breakeven". Your assumption that Tyc will continue to perform in the future as it has for the last few months is quite likely to be wrong at some point. Imagine, for example, if Breen had to lower guidance again, as BKS did today. A similar reaction would be likely for Tyc. I'm not predicting that but only making the point that there are many good and bad things that can happen to interfere with your strategy. Your definition of "breakeven" ignores such risks.

      • 1 Reply to sbrill222
      • My breakeven point of $23.00 is straightforward and not in the least bit misleading. You and others forget that options can be ROLLED - I don't at all have to lose my positions if the stock goes up.

        Right now for example, the January 17 1/2 calls can be bought back for $105 per contract. If you look at the price of the LEAP options for January '04 with a 25 strike price, they are currently $170 asked. So if I wanted to, I could roll all of my short options out a year to 25 strike prices and would put even more money in the account. And if the stock was $23 at that time, there would be no problems at all cashing out for the full $23.

        Also, since I am short only 5 of the 20-strike puts with all other naked puts being 17 1/2 or less, it's obvious that at $23, all of the puts would be worthless.

        Any way you cut it, my breakeven really is at $23 - and is declining each month as I continue to sell the snake oil and to use the proceeds to add to my holdings.

35.15-0.10(-0.28%)Nov 27 1:01 PMEST