[Moving Stop on Lam Research (LRCX) Jan '06 25 LEAPS calls (WMJAE)/Contingent on stock hitting $20.49 or below sell to close Jan '06 $25 LEAPS calls (WMJAE)]
Dear Member,
Lam Research has made a little move up so I am now moving my stop up on the Jan '06 LEAPS calls (WMJAE)to reduce any loss that might be suffered if it turns down. My stop is now contingent on the stock (LRCX)hitting or descending below $20.49.
Yesterday I received an email from a member who did not like the trade and indicated he did not think it "serious" and considered the company a "do nothing." Let me explain what I saw to influence my decision to enter the trade. First, my entries are all technical. In this case, the stock had just come off a double bottom and was trading around $21. As recently as April, it had been at $27. Can I make money if this stock moves $6 and I own a call option with a delta of about .50? Of course. If the stock price increased $6 I would make approximately $3.00 on an investment of $3.80 (that's where I was filled). In addition, and importantly, the options were "cheap" when I bought them. Cheap or expensive in options is not their premium cost, it is determined by the percentile in which implied volatility falls. In this case, the options were in only the 5th percentile of implied volatility. I consider anything below the 10th percentile to be cheap. Thus, the options should increase in value if implied volatility increases let alone if the stock price increases.
Finally, my initial exit was close to my entry thus assuring, as best as possible, that my loss would be limited to about $0.60 or $0.70 if the stock immediately turned against me.
Hope the above gives you some idea of my approach to this position.
DISCLOSURE: At the time of publication, I am long the referenced '06 $25 LEAPS calls (WMJAE) on Lam Research (LRCX).
Sincerely,
Bill Kraft
CutLoss, Inc
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