Dykstra: Cash Money With International Paper

I am also a fan of DITM options. I buy options that are 10% to 20% in the money that have two or three months until expiration. But I do take losses when my position goes against me, with a 20 to 30% loss target. In your scorecard, I see only the gains listed. But how about the losses? What percentage of your trades end up in losses, and what is your strategy for taking losses?

I would really appreciate your input.

-- Chandra

With my DITM calls strategy, we trade using fundamentals, technical strength and time. We don't go into a position with a loss target in mind. When the market drops or experiences extreme volatility, like we have seen recently, the stocks that tumble become more attractive, as they have just gone through a series of price cuts. But the fundamental strength of the company will prevail 90% of the time or better.

The market overreacts to news, be it good or bad. When our positions lose value, we re-average with more purchases when the stock hits the next level of support. This way, when the bounce comes, we don't have as far to go to turn our investment into a win. So to answer your question, to date there have been no losses to include in the Stat Book; that is the reality of my DITM calls strategy to date.

Lenny:

Thanks for your hard work in researching DITM plays for all of us! I have a question about two recent wins ... Wachovia (WB) and Merrill Lynch (MER). Your stat book indicates that you must have held 40 contracts of each. However, how are we supposed to know what the next "next buy level" is on recent purchases, since you don't supply those until Wednesday in the stat book.

It would be very helpful to know what the next level to buy is when you initially discuss the option ... otherwise, we're not sure what to do! I still hold WB because I did not buy any more from your initial recommendation (I was waiting for the "next level"). Thanks again!

We purchased Merrill Lynch on July 23 and Wachovia on July 24; in both cases the option to purchase was filled on the day of the column. On Wednesday, July 25, the stat book was published with the next buy levels for both stocks listed along with the next buy levels for all open positions. On Thursday, July 26, when the market took a hit in the knees, both stocks reached their next buy levels and 10 additional contracts were purchased for each.

Then, correctly anticipating a nice bounce, I recommended a purchase of 20 more contracts each on Monday, July 30. The bounce occurred the following day, on July 31, and we pocketed $8,000 in profit in just eight days, and I might add, right in the midst of one of Wall Street's worst weeks.

Sincerely,
Lenny Dykstra

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