Pairing Up for Profit
Buy calls and buy puts: Obviously this will have a lower cost and reduced risk compared to the all-stock position. The main disadvantage is the time decay. You will need the value spread between the two issues to move substantially in your predicted direction to overcome the erosion of the options' premium. If both stocks stand still, the position will lose money. In this case, it definitely makes sense to use long-term and somewhat deep-in-the-money calls.
Sell calls and sell puts: The initial capital requirements will be nearly equal and the risk is just as great as the stock-only position. But the potential profit is limited to the amount of premium sold. The main attraction of employing this strategy would be to take advantage of time decay and rich premiums. In this case, it definitely makes sense to use short-dated options and not go too far into the money. Even if both stocks remain unchanged, this position can make money.
When Dell (DELL) lowered revenue and profit forecasts last week, investors were trying to determine if the issues were specific to Dell or a sign of trouble for the whole PC industry. It seems that the shortfall was the result of a shift in Dell's marketing from low end to higher margin products and is therefore a Dell-specific issue.While I'm not pounding the table or wildly bullish on the PC sector in general, I do believe this provides a small window for some of the also-rans to gain back a little market share. I think going long Gateway (GTW) and short Dell could prove profitable over the next eight to 12 months. I'd look to buy calls in Gateway and buy put options on Dell. With Gateway currently trading around $3.10 and Dell near $29 per share, one could buy the Gateway January 07 $2.50 calls for around $1.10 per contract and buy the Dell January $30 puts for around $3.50 per contract.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV