Dykstra: Battered Morgan Stanley, You're Up

Many readers have noted that there are times when I have placed my GTC limit order to open a position at a lower premium than the current market rate; this is my way of matching the next support level with the option premium.

If a stock is trending down, I will put my order to open at the place where the option price needs to be, then I sit back and let it come to me. But remember, if the order doesn't fill, I won't chase it; I will just let it go, because there are many opportunities available for successful DITM calls.

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I noticed on the Stat Sheet that you have changed your GTC sell order for Oct. Nov. Dec. from a $1.00 to 50 cents. Is this because of the amount of time left? Or is it due to the total market conditions? Or is it to pull money back to a cash due to having to much money at risk and to have cash for better trades.

Thanks for all you do for us small investor.

-- Bill

You are correct on all counts. When a DITM calls position is open for several months, I will typically lower my target sell price to exit the trade quicker and free up capital for DITM calls that have the potential to move faster. When trading, the length of time you hold a position is a critical component of your ROI; the quicker you can turn it, the higher your return. And, with market conditions right now, quick wins are possible in many sectors of the market, so converting open calls to wins is the name of the game.

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A quick question for you: I bought the MSQAJ (MSFT Jan 25) calls when you did. Monday you recommended the Microsoft Jan 22.5 calls (MSQAX). Why did you start a new position with the lower strike price instead of just adding to your existing MSQAJ position?

Also, the MSQAJ position had not yet reached the next buy level point of $27.50. I'm not being critical; I just want to understand why you did this! I believe I understand your strategy pretty well and have introduced it to others, but I didn't follow this logic. Thanks and keep up the good work.

-- William

With my DITM calls strategy, it is all about available opportunity. I am constantly reviewing my open positions, and at times it makes sense to buy more of those options, even if the next buy level has not been reached. At times the premium available is just too good to resist.

This was the case with the new position in Microsoft(MSFT Quote). The premium for the January $22.50 was more attractive a play than adding to the January $25s. This is one of the nice features of buying options. You do have the option to buy and sell at more than one strike price. Each option, although usually mirroring the movement of the stock, will at times move differently, creating additional opportunities for a DITM calls play. And when opportunity knocks ...