Dykstra: Playing by the Rules

Editor's note: Lenny Dykstra will explain his deep-in-the-money calls (now 70-0 for the year) at TheStreet.com Investment Conference on Saturday, Oct. 25. Click for details.

I may have a perfect record with 70 wins and zero losses this season, and I may make it look very easy at times. The truth is that I put in a lot of hard work so that it is as easy as possible for my readers. In the end, though, it's worth it. The system works -- in both up and down markets -- and the proof is in the pudding, as they say.

I tell readers all the time that it is important to follow the rules. I have gotten a number of questions lately about two of the rules, so let me explain them in a bit more depth.

First, my strategy calls for buying deep-in-the-money calls. I usually pay a premium of $1 or less to purchase these options contracts. Sometimes it's a little over a dollar, but it doesn't happen all that often. That's a main part of my system and it's part of my ground rules.

I figure out the basic premium by adding together the strike price of the option I am purchasing plus the amount I am going to pay to purchase each contract. From that total, I subtract the price the stock closed at the previous day. When that calculation is done, I should have a premium of less than $1.

Another major part of my system calls for only purchasing the contracts at a price I find attractive. This is really important and the subject of several emails I have gotten recently. So let me explain how I arrive at my purchase price.