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Cheapie Puts, Calls Are the Way to Go

By: Rick Ackerman, Rick's Picks


-- Posted Friday, 27 January 2006 | Digg This ArticleDigg It! | Source: GoldSeek.com

Rick’s Picks

Friday, January 27,2005

For investors who’d rather be smart than lucky

                                                           

A short squeeze in the final hour of Wednesday’s session telegraphed yesterday morning’s bolt from the gate, leaving us with little to do but pick our teeth. We had a 0.15 bid in for some Citigroup Feb 47.50 calls (CBW) on the opening, but it proved too stingy. Because these calls had traded freely for 0.15 the day before, I made the mistake of thinking there’d be plenty of them for sale at that price when the stock began to trade Thursday morning.

No such luck. The calls opened for 0.20 and never looked back, trading as high as 0.60 intraday. That kind of movement could make you wonder why so many advisory services like to load up their subscribers with calls and puts that cost $200-$300 or more apiece. I’ve been trading options on and off the floor for more than thirty years and can’t remember more than a few instances when $3 options that I owned tripled in price. Yet, here was an easy 400-percenter in Citi , a call option you could have bought in copious quantities for bupkus the day before. And how much would you have risked!? The final sale on Wednesday was at 46.25, meaning the Feb  47.50 calls, quoted at 0.15-0.20, were $1.25 out-of-the-money. If Citi had gapped down $1 the next day, how much might you have lost? Answer: probably no more than 0.05. That’s because the Feb 47.50 calls would have been quoted 0.05-0.10, or perhaps even 0.05-0.15. A rip-off? Sure. But why should the market makers want to offer them any cheaper than that with nearly a month remaining for Citi to do something crazy.

The calls might have a theoretical value of, oh, 0.06 cents with the underlying stock trading near $45. But who would want to short-sell them at fair value with so much time left to get hurt. Why not simply quote a wide spread – say, 0.05 bid, 0.15 asked – and leave it at that. If any come in for sale on the bid, you are stealing them legally; and if buyers come in to pay-the-market, you can sell them for a price -- 0.15 -- that you can feel good about, risk-be-damned. And if some Honest John wants to offer them for 0.10, you can be there on the offer with him, selling calls for 0.10 that you’d bought less than a day earlier for 0.15 with the stock a dollar higher.

When one can buy an option for 15 cents that quadruples in price in a day, it’s a mystery to me why you’d want to pay $3 to $4 apiece for in-the-money calls or puts. Crazy, really.

*** 

Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com


-- Posted Friday, 27 January 2006 | Digg This Article | Source: GoldSeek.com




 



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