-- Posted Wednesday, 8 March 2006 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Wednesday, March 8, 2005
For investors who’d rather be smart than lucky
We billboarded a 49.08 target in Newmont yesterday because a fall to that number, precisely, looked like a lead-pipe cinch. Our strategy was therefore simple: Put up a 49.08 bid on the opening, then simply wait for NEM to come to Papa. And so it did, sort of. After a curmudgeonly feint higher in the early going, the stock reversed course and plummeted four percent to 49.20. Those of you with bids in at 49.08 will be the first to attest that 49.20 is not quite 49.08. Ditto for subscribers who, instead of bidding for stock, substituted a 2.00 bid for some April 50 calls. Neither bid got hit, and the stock ran away from us after making a double bottom at 49.20 in the space of about 15 minutes. Better to have come up empty-handed, perhaps, than to have sat on our thumbs the whole morning. Of course, we’ll be doubly determined, and just a tad more flexible, the next time NEM wiggles its butt in our face.
The good news is that we are starting to get the hang of put options. a shell game whose rules mutate just often enough to thwart the less diligent. Clearly, the trick is to handle puts as though they were radioactive, holding inventory up to the point when it threatens to stink up the room. In IBM, for instance, we bought some cheapie puts a few days ago, April 75s for 0.35, that we’d hoped to turn into instant doublers. But when they remained leaden the other day as the stock was falling, we decided to hit a 0.45 bid and exit with a small profit.
Yesterday we held some Merrill Lynch March 75 puts acquired for a pittance – just 0.15. How hard should it have been to double one’s money on those? Not very, as it turned out, and so we did, swallowing our pride at having failed to triple our money in mere days. With the underlying stock looking somewhat sickly in the opening hour, our 15-cent puts trade as high as 40 cents. Actually, our Black-Scholes model had them worth 0.50 at the time, leaving us to infer that we’d better dump them like everyone else before the stock turned higher and they really got trashed.
Pavlov’s Dogs
In the end, we sold half of our puts for 0.35, giving us a cost basis of zero for the ten that remain. A promising start, for sure. But like Pavlov’s dog, we’ve been conditioned to salivate when any puts that we own turn even slightly perky. This all but guarantees that we will someday cash out some cheapies that have doubled in value on a day when they are on their way to a 50-fold increase in value.
The fact that so many premium sellers were on the wrong side of that trade in 1987 is what made the October Crash so breathtakingly exciting. It will surely happen again, but not in a way that will allow any of us to brag that we saw it coming and acted accordingly. Put-option zealots would all be broke by now amyway, leaving only us dabblers to play. And to survive.
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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 © 2005, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Wednesday, 8 March 2006 | Digg This Article | Source: GoldSeek.com
