Joshua: ” I know of your advice on Options (stay away) — but I also know that in the past you have traded them, so I was wondering, with all this volatility in the stock market, wouldn’t this be an interesting time for options?”
The problem is that, because of the volatility, they’ve become commensurately more expensive. So it’s still a rotten time to use them.
The one place I’ve had a little occasional success with options is with LEAPs — very long-term call options that are traded on some stocks. Mostly it was just luck, but, at least as compared with the more casino-like short-term options, there are advantages.
For one thing, your gain, if you have one, will be taxed as long-term if you hold the LEAP more than a year. For another, by its nature, a LEAP suggests less in-and-out trading costs. Holding a LEAP for two years (say) exposes you to just one set of commissions when you buy and sell, one set of spreads between bid and asked.
I took a leap of faith when Steve Jobs returned to Apple. The January 2000 LEAPs that entitled you to buy AAPL at $20 cost $4 just each. (Last month, when they expired, AAPL stock was over $100, so the LEAPs were worth $80.) In hindsight, I just wish I had taken a greater leap.
LEAPs on highly volatile stocks, or on stocks everyone expects to go to the moon, will be too expensive. Apple back then, fortunately, was a basket case with little hope of success.
(As usual, please note that I have at least as many disasters as Apple-like winners. I am an idiot. For example, I bet — with straight stock, not LEAPs — on Golden Books Family Entertainment, which had been taken over by the former CEO of Simon & Schuster. I lost more on that than I had ever earned from Simon & Schuster in royalties.)
(And while I’m being parenthetical, it occurs to me to be clear that when on Monday I “recommended” 200 shares of U.S.A. Floral to the fellow who asked what stock to choose as a $500 Valentine’s Day gift, I was being funny. I wish the company well, but meant what I said about its seemingly bleak prospects.)
Quote of the Day
In 1800, 75% of [an American's] working man's expenditures went for food alone. By 1850, that had dropped to 50%. Today it is a little more than 11%.~The Wall Street Journal, September 20, 1996
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