You’ve heard the phrase “Defense wins championships.” Let me tell you why these th...
For Option Traders Only!
06/06/2003 12:00 am EST
We strong caution investors not to invest in areas in which they are unfamiliar. This includes options and straddles and only those fully familiar with these investment practices should consider buying these positions. But for sophisticated traders, we offer the following triple play, from a variety of options experts--Bernie Schaeffer, Larry McMillan, and Elliott Gue.
"We recommend buying a September 15 straddle on Ask Jeeves (ASKJ NASDAQ)," says Elliott Gue in Trading Floor Pros . "For those of you unfamiliar with this type of trade, it's basically a combination of equal numbers of put and call contracts with the same expiration month and strike price. You can make money no matter which way the underlying stock goes, it just needs to move a long way in either direction. That's because as Ask Jeeves falls, the puts gain value; as it rises, the calls gain value. Just make sure you buy equal numbers of contracts, not equal dollar amounts in the recommended puts and calls. In other words if you decide to buy ten calls, you should buy ten puts as well. This means that the position will profit most quickly from a fall in the price of Ask Jeeves. Our thesis with Ask Jeeves is that this Internet portal is partying like it's 1999 again. The stock has risen from under $2.50 to over $13.00 this year alone--an amazing run by any measure. Much of this rally is on pure momentum and the recent rise in volume for ASKJ is characteristic of a blow-off top. Once that momentum dissipates, the stock should pull back to well under $9.00 and hand us a nice gain on this trade. In this case, the gains on the puts we're buying will exceed the loss on the calls. Alternatively, if we're wrong and the momentum traders decide to pump Ask Jeeves a little higher to over $17.50 or so we'll also make money on this trade. In this case, the gain on our calls would exceed the loss on our puts."
"If the market breaks out to the upside--especially if it gaps to the upside--there will be a huge, mad scramble by short sellers," says Larry McMillan, editor of The Option Strategist . "Generally when that happens, prices rise so fast that their losses are much greater than they every imagined they would be. So, while the sellers' projections for potential profit may be okay, I think they are not assessing just how big their risk could be. If this transpires, it will be part of the upside explosion that we still view as a possibility. For now, we retain our bullish stance. Meanwhile, the number of stocks with cheap options continues to grow. Our latest recommended position is a straddle buy--in this case we recommend a straddle position in Home Depot (HD NYSE). In specific, we recommend buying 4 HD Nov 32.5 calls and buying 4 HD Nov 32.5 puts for a combined debit of 5.50 or less. We also recommend buying calls on Xilinx (XLNX NASDAQ). We recommend buying 5 XLNX July 30 calls at 2.50 or less. This position can be heldwithout a stop."
Adds Bernie Schaeffer in The Option Advisor, "Netflix (NFLX NASDAQ), the online DVD rental firm, has consistently outperformed the Nasdaq Composite since October 2002. The shares are now in the process of pulling back to former support at their rising ten-week moving average. Additional support could come into play at the 20 level, which has served as a solid base for the past two months. Meanwhile, investors are falling over each other in an effort to short NFLX's strength. A major financial weekly recently called for a top in the stock, citing heavy short interest. Indeed, the number of Netflix shares sold short has pushed to 7.2 million, even in the face of its steady trend higher. As long as everyone continues to look for a reversal in the shares, it's unlikely that one will appear. The brokerage community is also ignoring the stock, with only three analysts covering NFLX. Future coverage on the heels of any strength could bode well for continuing the uptrend. For options players we recommend buying the December 17.50 call."
This is the end of my vacation – eight days in Argentina – with plenty of hot weather, t...