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Klouche:
Would you please direct me to the post containing your explanation of the "Rat2"/Ratio procedure.I had copied it,but have unfortuneately lost it somehow.
I used it to purchase 4 6/3 options last Tuesday that are now showing a gain of approx 115%(all four of them are up with QCOM going nuts!!!)
I plan on purchasing my next batch of4 shortly and would like to review this explanation.Thanks/Wayne
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I used it to purchase 4 6/3 options last Tuesday that are now showing a gain of approx 115%(all four of them are up with QCOM going nuts!!!) I plan on purchasing my next batch of4 shortly and would like to review this explanation.Thanks/Wayne

Bass,

All I did was take the Stock Price / Option Price ratio (should be around 5 to 10) and divide by the % out of the money the option strike price is, i.e. (Strike-Stock)/Stock. So the the ratio becomes:

Stock^2/((strike-stock)*option)

As you can see when strike=stock the ratio becomes infinite, therefore this tool is only useful comparing OTM options in the 5-15% range. Below 5% OTM, it favors too much to the lower OTM options.

Yes, lately I empathize more with Midas than ever before.

KL

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Klouche:
Thanks for the quick reply.This was my first shot at options and I guess is beginners luck.(Itold my wife about the QCOM 300% gain now and as she started to faint she was mumbling SSEEEELLLLLLLL!!!!!!!!!!)Bassattack/Wayne
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<<.(Itold my wife about the QCOM 300% gain now and as she started to faint she was mumbling SSEEEELLLLLLLL!!!!!!!!!!)Bassattack/Wayne >>


You shoulda heard my wife when I called her at work and told her that QCOM was a 10-bagger for us!

Dang! Why didn't I buy 20K worth instead of only 2K?

Ray
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My Qcom stock is up 143% and the options up 375%.

My low 5 figure investment is approaching 6 figures.

I've been here a couple of times this year and lost my nerve and bailed out.

Who knows when Qcom will go off the screen and the option is an Apr220 that still has two months to run. I'm determined to stay the course.......however

IT SCARES ME AND I'M FEARLESS

Bud
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"IT SCARES ME AND I'M FEARLESS
Bud"
*****************
Fight! Fight! Fight!
Whenever I get the feeling you're describing I ask myself this: What will the winning decision be over the courses of a 100 cases like this, not just this case? In RS stock screens, and in options, letting your winners run will be the winning choice over a 100 iterations, but no one can predict what will happen on a single one.

Sparfarkle
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My Qcom stock is up 143% and the options up 375%.

My low 5 figure investment is approaching 6 figures.

I've been here a couple of times this year and lost my nerve and bailed out.

Who knows when Qcom will go off the screen and the option is an Apr220 that still has two months to run. I'm determined to
stay the course.......however

IT SCARES ME AND I'M FEARLESS


Lucky you! There's no need to be scared. With options you can do something about it and still stay in the game. Your AAODD closed today at a bid of 137 3/4. Assuming you own one contract, that's worth $13775. The option price is more than 1/3 of the stock price which means that going forward you can get less than 3:1 leverage.

It may be time to scale up. Sell your AAODD and immediately buy AAFDH, the Apr00 strike 340 call. Its ask was 61 3/8 today. You'll be taking about $7600 off the table and you'll still have a QCOM option that allows you to gain further if the stock keeps running.

But think about this carefully. You'll be paying a price for this insurance. The time premium on your current option is $12. The premium on the new one is $56. So you'll be paying $4400 to lock in $7600 of gains while staying in the game. The new option will take you back to potential leverage of close to 6:1.

Think about it. I'm not sure I would do it myself but it's worth considering. I'm no expert so I don't know if there are better ways to accomplish a similar outcome.

Elan
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"lucky you! There's no need to be scared. With options you can do something about it and still stay in the game. Your AAODD closed today at a bid of 137 3/4. Assuming you own one contract, that's worth$13775. The option price is more than 1/3 of the stock price which means that going forward you can get less than 3:1 leverage.It may be time to scale up. Sell your AAODD and immediately buy AAFDH, the Apr00 strike 340 call. Itsask was 61 3/8 today. You'll be taking about $7600 off the table and you'll still have a QCOM option thatallows you to gain further if the stock keeps running.But think about this carefully. You'll be paying a price for this insurance. The time premium on your current option is $12. The premium on the new one is $56. So you'll be paying $4400 to lock in $7600 of gains while staying in the game. The new option will take you back to potential leverage of close to 6:1.
Think about it. I'm not sure I would do it myself but it's worth considering. I'm no expert so I don't know ifthere are better ways to accomplish a similar outcome."
***************************
This is a good analysis Elan. The person who chooses an option rollup must be aware of what the fundamental difference between an OTM option and an ITM one is: The OTM one has a lot more speculative time premium in it. When you roll up, you take dollars off the table, and those are inviolable. On the other hand, intrinsic value is the inviolable part of an option's price, while time value is the malleable part. So when you sell ITM and go OTM, you give up some inviolable stuff too. It's a tradeoff and a complicated one. My personal belief has become that if you have an enormous winner in an option, where the tradeoff ratio is .7 to 1 (as MagicDragon eloquently played out in his messages), rolling up makes sense. Below that, I think a policy of not tinkering with winners (the lifeblood of leveraged investing) is best.

Sparfarkle
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The person who chooses an option rollup must be aware of what the fundamental difference
between an OTM option and an ITM one is: The OTM one has a lot more speculative time premium in it. When you roll up,
you take dollars off the table, and those are inviolable. On the other hand, intrinsic value is the inviolable part of an option's
price, while time value is the malleable part. So when you sell ITM and go OTM, you give up some inviolable stuff too. It's a
tradeoff and a complicated one. My personal belief has become that if you have an enormous winner in an option, where the
tradeoff ratio is .7 to 1 (as MagicDragon eloquently played out in his messages), rolling up makes sense. Below that, I think a
policy of not tinkering with winners (the lifeblood of leveraged investing) is best.

Sparfarkle


Aha! As I wrote my message I was hoping that you would be there to illuminate, and Viola!

If you don't mind, could you illustrate the tradeoff ratio with this QCOM example? I didn't absorb it last time, and you know how difficult it is to search on this board. ;-)
(The new search function is coming Real Soon Now. Honest.)

Elan
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"Aha! As I wrote my message I was hoping that you would be there to illuminate, and Viola! If you don't mind, could you illustrate the tradeoff ratio with this QCOM example"
***************
Hi Elan, see message #22946, which was Ray's message in his option demo where he did several very intelligent thumbnail views of how the delta on his VISX option called for a rollup. If anybody reading this post doesn't understand "delta" as he refers to it there, you can use an option calculator to get the delta on an option you own (delta is how much the optino moves relative to a given move in the stock price). The best graphing options calculator on the Web is:
http://www.axone.ch/Calculators/OptionCalc.htm
Enter the strike, underlying and expiration for your option and it will calculate your delta and graph it too.
Basically, MagicDragon's argument was that if delta's above .7, rollup. I'll try to search for MagicDragon's posts too, because they were really useful.

Sparfarkle
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One possible alternative for the "extreme gains" situation is to sell a call against the one you own that is deep in the money.

However, I want to say that I have not run the numbers on these options.

The deep ITM cal has a delta approaching 1. And has little premium in it above the intrinsic value. Also, we may expect that, even though there was a very high implied vol. when the option was purchased, it should be higher now. But you must look at the IV for the 10% OTM when you bought compared to the 10% OTM now.

The ATM call at $60 for the 345 strike should have a delta of about .5. So, if you sell a call, you get $6,000 off the table but will get a reducing % of the gains if the price continues to increase.

QCOM is not AMZN or YHOO. It is a real company with real ernings and extimates that must realized and met. Not simply revenue objectives with goofy price/sales multiples. At some point this thing will have a hard pull back. Perhaps you can buy back the call with the underlying at a lower price and a contraction in the IV. Of course, your original option will decrease in price then also. But that would have happened to you anyway since you were committed to holding for the full three months.

I sure like this idea better than the buying Puts thing. Whenever you are buying options you are paying premiums. And, generally, option sellers are not going broke selling these things. The screens are allowing you to beat up on the sellers because of stock selection, not option trading expertise. When you may have an opportunity to take in some preium after an extreme gain, it should be considered along with the other strategies. Remember, you are not going to hold this thing forever anyway.

Good Returns
Charley Meng

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Just one other comment on the extreme gains situations.

How can I:
A) Lock in my gains (take money off the table or prevent loss), and;
B) Keep my 1:1 delta that I have finally reached since the stock price has skyrocketed, and;
C) Restore my original leverage on future gains in relation to today's option price.

There is no way do do all of these things. It just cannot happen. Whatever you do will have tradeoffs among these three moves.

Good Returns
Charley Meng
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"""Fight! Fight! Fight!
Whenever I get the feeling you're describing I ask myself this: What will the winning decision be over the courses of a 100 cases like this, not just this case? In RS stock screens, and in options, letting your winners run will be the winning choice over a 100 iterations, but no one can predict what will happen on a single one"""
*****************************************************


Thanks Sparfarkle. The information that You and Elan have furnished is, as usual, first rate.

I've gone through the posts that you suggested and as far as I can tell rolling up would not be wise. The increased volitility in QCOM has made the options very expensive.

I rolled up from Jan155 to the Apr220 and took a lot of profits off the table at that time. At this point QCOM would have to drop about 50% in the next two months for me to come out with a loss. Possible but probably not too probable.

I think I'll go fishing and forget about it until January. Yeah...Right.

Thanks again,

Bud
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Thanks for the reply Elan.

I've been reading this board for a year now and I'm still amazed at what you can learn here..

A year and a half ago when I stumbled on the Fool in AOL I was still falling for the underperformance of the Mutual funds and now I'm worring about what to do about a 375% one month gain!!!

Times sure have changed.

Bud
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Boy am I happy I started this thread!The posts that developed by the members of this board in this thread are a great summary of the various options(pardon the pun)when there is a sizable gain in an option.Thanks to all that have posted in this thread and to those who posted the prior posts mentioned in these posts.(HuH??)
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BassMan:

Just wondering. Will your first nationwide TV appearance be on the fishing tournament program. Or on some investment program. Please don't wear the goofy fool hat.

Good Returns
Charley Meng
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"""Boy am I happy I started this thread!"""
*********************************************
One of the things that makes this community(I hate to think of this as a board) so addicting is that very seldom does a day go by that I don't learn something.

Haven't learned so much in such a short time since my college days 40 years ago.

To those who so generously provide that knowledge:

Thank you...thank you....thank you

Bud
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TMF Elan wrote:

Lucky you! There's no need to be scared. With options you can do something
about it and still stay in the game. Your AAODD closed today at a bid of
137 3/4. Assuming you own one contract, that's worth $13775. The option
price is more than 1/3 of the stock price which means that going forward
you can get less than 3:1 leverage.

It may be time to scale up. Sell your AAODD and immediately buy AAFDH,
the Apr00 strike 340 call. Its ask was 61 3/8 today. You'll be taking about
$7600 off the table and you'll still have a QCOM option that allows you to
gain further if the stock keeps running.

But think about this carefully. You'll be paying a price for this insurance.
The time premium on your current option is $12.  The premium on the new one
is $56. So you'll be paying $4400 to lock in $7600 of gains while staying
in the game. The new option will take you back to potential leverage of
close to 6:1.

Think about it. I'm not sure I would do it myself but it's worth considering.
I'm no expert so I don't know if there are better ways to accomplish a
similar outcome.

For what it's worth, here is my real-life example of rolling up QCOM and
JDSU options.  (And I hope I do this math right...)

          9/2               11/8                11/12
1 AAODS   24-3/8 $2451.50   108-5/8 $10848.50
2 AAFDF                      33-3/4 $ 6766.00   93-1/2 $18684.00
  QCOM    167-1/4           292                 378

That is, on 11/8 I sold one AAODS (QCOM Apr195 Call) that I had bought on
9/2.  I took $4082.50 off the table and bought 2 AAFDF (QCOM Apr330 Calls).
Today, those are valued at $18,684.00 (taking into account the commissions
I'd pay).  Total value (cash on the side plus the AAFDF options) is now
$22,766.50 for an increase of 829%.  QCOM has increased 126%, so that means
an overall leverage of 6.6X.

AAODS currently has a bid of 189-3/8, which means that if I'd not rolled up,
I would only have $18,923.50.  So not only did I lock in a $4,000 gain by
rolling up, but I also got about $4,000 more profit.

For my JDSU options:

          9/27              11/1               11/12
2 UNQCE   11-7/8 $2391.00   50-7/8 $10159.00
4 UQDCT                     10-3/8 $ 4170.00   29-3/4 $11880.00
  JDSU    111-15/16                            200

I sold 2 contracts UNQCE (JDSU Mar125 Calls), kept $5989.00 and bought
4 contracts UQDCT (JDSU Mar200 Calls) which are now worth $11880 for a
total value of $17,869.  This is a gain of 647%.  JDSU has risen 78.7% over
this time, giving the options an overall leverage of 8.2X.

If I hadn't rolled up, the 2 UNQCE option contracts would be worth $15,884
(bid = 79-1/2, and accounting for $16 commission).  Rolling up locked in
about a $6,000 gain and still gave me an additional $2,000 over where I'd
be otherwise.

BTW, many thanks to Prof. Sparfarkle, for selflessly contributing the
knowledge and the confidence to begin trading options!  And thanks also to
those who developed all the wonderful screens that led me to choose QCOM,
JDSU, AAPL, SUNW, CY, CTS, ADBE and USM as underlyings.  I only started in
September, but my initial $18,000 stake has already grown to over $66,000!
It's incredibly mind-boggling to me.

Best regards,
Craig
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cnishida wrote:

<<For what it's worth, here is my real-life example of rolling up QCOM and
JDSU options. (And I hope I do this math right...)

9/2 11/8 11/12
1 AAODS 24-3/8 $2451.50 108-5/8 $10848.50
2 AAFDF 33-3/4 $ 6766.00 93-1/2 $18684.00
QCOM 167-1/4 292 378

>>
====================================================
I had a similar rollup with NT around 11/4 and observed the similar kind of further gain, except I only rolled up the same number of contracts.

I noticed that in both rollups you have doubled up the number of contracts. What did you base your decision on? Is it more profitable that way?

Thanks very much.
Frank

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For what it's worth, here is my real-life example of rolling up QCOM and
JDSU options. (And I hope I do this math right...)


Craig, would you mind sharing more information about your roll-up method? What is the trigger point? How do you select the new option and how much to invest in it? You didn't roll out to a farther expiration date. Would you if one was available? And if so, how would you select it?

Thanks
Elan
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Frank wrote:
>cnishida wrote:
<<For what it's worth, here is my real-life example of rolling up QCOM and
JDSU options. (And I hope I do this math right...)

           9/2                11/8                11/12
 1 AAODS   24-3/8 $2451.50    108-5/8 $10848.50
 2 AAFDF                      33-3/4  $ 6766.00   93-1/2 $18684.00
   QCOM    167-1/4            292                 378

>>
====================================================
I had a similar rollup with NT around 11/4 and observed the similar kind of further
gain, except I only rolled up the same number of contracts.

I noticed that in both rollups you have doubled up the number of contracts. What
did you base your decision on? Is it more profitable that way?

TMF Elan wrote:
Craig, would you mind sharing more information about your roll-up method? What
is the trigger point? How do you select the new option and how much to invest in
it? You didn't roll out to a farther expiration date. Would you if one was available?
And if so, how would you select it?

Hi Elan and Frank,

Gosh, I'm so new at this so I hope you'll pardon my mistakes...  Remember that I've
only begun options trading a little over 2 months ago, trying hard to apply the
guidelines laid down by the venerable Sparfarkle.  I'm still trying to digest HIS
rules.  Making any of my own seems sacrilegious somehow.  ^_^;;

At the time of the JDSU rollup (Nov 1) I did an off-the-cuff calculation of the
option I had (2 contracts of UNQCE).  It was then about a 4-bagger, and very deep
ITM.  I noticed that it wasn't growing as fast as the OTM options.  I think this must
be some kind of rule, but I probably don't remember the details from any of
Sparfarkle's lectures...sorry.  Or maybe it was a MagicDragon or Rayvt post?

So I decided to roll it up to an OTM option again.  On Nov 1, JDSU was around the
upper 160's, and the deepest OTM option had a strike of 200.  20% OTM was fine by me.

To choose the expiration month wasn't a problem, as I recall.  There was no April
2000 option, so I just kept it as a March 2000 one.  This means I'll still sell to
close after 12 weeks of buying the ORIGINAL UNQCE option, not this new UQDCT one,
since I don't want to get within 3 months of expiration.  And now that Elan forces
me to think about it...  I think if one has a 4-bagger option, then that means the
underlying stock has been screaming hot, too.  Which means it'll still be on the
screens (Relative Strength ones, anyway), so I'd probably like to start another
12-week timeframe.  So if options with expirations 1 or 2 months further out exist,
then I'd go for them.

For the QCOM option, it also reached 4-bagger-dom a week later than the JDSU option.
Since the JDSU rollup worked so well I did the same thing again.

What is the "trigger point"?  I'm sure once you've reached a 4-bagger, it's time.
It may even come earlier, but I don't know how to calculate it other than in real
life.  Next time one of my options approaches a 3-bagger (should I be so lucky), I'll
try to make a comparison with an OTM option.  Well, I suppose "4-bagger" or "3-bagger"
isn't the correct criterion to use, is it.  I should probably use "% ITM" as the
trigger point.)

Now, why did I choose to double the number of contracts?

My thinking went this way...  I briefly toyed with the notion of rolling ALL of
the money up, buying as many contracts as I could, since, in essence, I'd be
leaving all my money on the table if I'd NOT rolled up so why not let it all ride,
baby, ride, bua ha ha!!!

But, alas, I was too chicken.  -_-;;;  (NOTE: If I *had* rolled everything up, I'd
be somewhere in 11-bagger land instead of in a measley 9-bagger ghetto...  OK, OK, my
values have become seriously warped these past 12 trading sessions...  I'll probably
require therapy soon...)

So then, I chewed on the notion of just buying the same number of contracts...

But these were 4-baggers at the time, so just rolling up 25-33% seemed unnecessarily
too conservative...  I mean, the take-home message I kept getting from Sparfarkle's
posts is that you let your (few) winners run, 'cause they'll support all the losers
you're bound to get, right?

So, I ended up "splitting the difference," taking enough off the table to justify
a decent gain even if everything tanked afterwards.  In this way, I'd be playing
with "house money," so to speak.  (Hey, I'm an options newbie.  I wanna gain some
confidence first!)

Of course, the fact I had 6 other option positions that were up an aggregate 100% or
so (and only 1 option--VISX--that's tanking) made this move pretty easy to make.
Amazing what widespread success can do for one's peace of mind.

Regards,
Craig
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