As usual the blogosphere is on something for a minute then on to something else with no follow-up and I'm just as guilty as everyone else in that regard. So I was thinking yesterday - I wonder how Jimmy Crack Corn Pone's protege Lenny Dykstra is doing with his AMGN deep in the money July 55 calls play now that AMGN looks like this -
Looks to me that Lenny is doing just fine and is having the last laugh on all of us - but wait - let's review the bidding.
He bought 80 contracts at a variety of prices and I could work out the basis for you but I prefer the contract by contract method to present the data - When he first began this play the deep in the money calls were at 12.70 - as of yesterday's close they are 6.90.
Here is a chart that shows the entire play from beginning to the present -
P per S is the price per share he bought at each increment. #C is the number of contracts purchased. Curr P is the current price of the option and Delta is the difference between current price and P per S. The rest is just multiplying out to get to a real value and we find that he is only 3.1K in the hole at the moment. He may even get through this without a scratch thereby proving his point - which is? You can save a bundle of money by avoiding his picks.
Here's the way it shapes up on my pivot point model -
Note that the place where Lenny bought the calls was stupid and if he had bought them at point "a" some nifty things could have happened - 1. He would have had a lower basis, 2. He would be buying on the ascendant trend vice the descendant trend, and, 3. He probably would have already made his buck profit and would have been out because point "a" was 4 bucks ago.
There is nothing inherently wrong with buying deep in the money calls - as long as you buy them on stocks that are going up and not down. Using a double up approach when the stock is declining is just stupid. If the stock is descending why not buy deep in the money puts - same basic principle just a different direction.