Secret 63 SITUATIONAL ANALYSIS
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Another method that I use for finding option plays is situational
analysis. I try to seek out specific stocks with an angle that
may provide an interesting option play.
For example, on September 24, 2001, a negative news item
on Electronics Data Systems (EDS) about incorrect financial reporting
prompted me to take a close look at both the chart of
EDS and its options. I found the options to be overpriced, and the
chart showed that the stock price had a lot of resistance at 65.
With the stock at 57, the Oct 65 call was .80 ($80) with only three
weeks until expiration. Setting a stop-loss at 66, I ran a simulation
of the probability of hitting the stop-loss. The simulator indicated
only a 5% chance of hitting the stop-loss, and that is how
it worked out. The play was to write the Oct 65 call naked, and
the option expired with the stock never getting close to the stoploss.
However, with news event plays, you must act immediately
before the stock makes much of a move.
In my situational analysis all pieces must be in place. In this
case here are the pieces: stock is likely to go down for the strategy’s
time span, options are overpriced, there is a high probability
of winning, and it is a good looking chart, which here means
a lot of overhead resistance.
When you find such a good statistical play, pounce on it, but
don’t plunge. Remember always take small positions when writing
naked.
Another method that I use for finding option plays is situational
analysis. I try to seek out specific stocks with an angle that
may provide an interesting option play.
For example, on September 24, 2001, a negative news item
on Electronics Data Systems (EDS) about incorrect financial reporting
prompted me to take a close look at both the chart of
EDS and its options. I found the options to be overpriced, and the
chart showed that the stock price had a lot of resistance at 65.
With the stock at 57, the Oct 65 call was .80 ($80) with only three
weeks until expiration. Setting a stop-loss at 66, I ran a simulation
of the probability of hitting the stop-loss. The simulator indicated
only a 5% chance of hitting the stop-loss, and that is how
it worked out. The play was to write the Oct 65 call naked, and
the option expired with the stock never getting close to the stoploss.
However, with news event plays, you must act immediately
before the stock makes much of a move.
In my situational analysis all pieces must be in place. In this
case here are the pieces: stock is likely to go down for the strategy’s
time span, options are overpriced, there is a high probability
of winning, and it is a good looking chart, which here means
a lot of overhead resistance.
When you find such a good statistical play, pounce on it, but
don’t plunge. Remember always take small positions when writing
naked.