Lenny's Letters: Don't Wait to Sell Winners

The 'disciplined trader' answers emails about his deep in-the-money calls strategy.
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I receive a lot of reader email in response to my weekly column on the


. Here I answer some of the most interesting emails I've gotten this week.

Not sure if you've found any good solutions for monitoring your call options when you're away from the computer, but I have one to suggest. If you have a Treo, check out StockManager. It lets you track stocks as well as options, and provides for over-the-air updates so you can see (at a glance) how things are doing (in numbers, graphs, etc.).Or, if you don't mind the steep monthly charges, you can sign up for QuoTrek for quotes on your PDA.The only thing missing when I check on my options, is being able to hear your wisdom on what to do without having to wait for your next weekly column. For example, Amgen (AMGN) - Get Report is down big time Tuesday, but the option premium is now way over a buck. Do we still buy more and average down? Thanks for an always-interesting column! -- Steve L.

Hi, Steve. Very interesting email, thanks for thinking about me.

One of the things you can do to guarantee yourself a winning trade, or to

add to a position

is to use a good-till-canceled (GTC) order. This way, you don't have to watch the tape at all times, your GTC order will just get filled if the stock trades to your price.

As far as Amgen, when it ran up on Monday, the day before the earnings release, that was when you could have sold it,

on strength

, as I suggested in my

April 10 column.

If you held or the rally didn't provide enough of a gain on Monday, what do you do next? Now is the time you have to go in and buy more! With the stock getting hammered after its earnings, I would put in a GTC order to pick up that same July $60 deep in-the-money call for anywhere between $8 and $8.50 (we previously paid $12).

If the order gets filled -- the July $60s settled at $8 on Friday -- for about $20,250 you would be in control of 2,000 shares, or roughly $135,000 equivalent of Amgen stock. Check out that leverage! It is almost unbelievable. Now, in my opinion, with your average cost now down to the low $10s, you can put in a GTC order at between $11.50 and $12.00. That could result in a huge profit. This is the beauty of deep-in-the-money calls.

Best of luck, Nails

Lenny, first off, thanks for the great baseball memories. Loved watching you play, and glad you've got a good thing going after the game with investing! Secondly, thank you for explaining in a little more detail your deep in-the-money strategy. It helps to see where you are going, as well as your tolerance for risk in such a strategy. As an aside, how do dividends affect your valuations in the money calls such as FPL (FPL) - Get Report?

-- Norman B.

Hi, Norm. Thanks for the kind words. It's encouraging to know that my weekly explanation of my "low risk-high reward" approach to making money in the stock market by using deep in-the-money calls is truly appreciated. I work extremely hard to provide you with information that will enable all of you to make money, which hopefully you have done if you've followed my strategy.

As for how dividends are involved in my strategy, you must understand that when you own the option, or the in-the-money call, you do not get rewarded for dividends. The only thing I look for when it comes to dividends, is if the stock is going to go ex-dividend days before I make the recommendation. Why? We will usually get the stock a little lower after it pays its dividend.

For us, the reality of the situation is as follows: With our strategy, we are going out at least four months in time; therefore, we need not worry too much about dividends. There are certain in-the-money calls that I will discuss and you will be out of them in one or two days! On the other hand, FPL is a great company, and they are giving away the September $35 calls. This is the definition of low risk-high reward.

Best of luck, Nails

Mr. Dykstra, I have been doing lots of research about options, in the hopes of soon beginning to trade options. At first I like the idea of close out of the money calls, but after reading your articles, crunching some numbers, deep in-the-money calls seem the only way to go. My only concern is if I buy a call that is deep in-the-money, and the stock price does appreciate, how liquid is my call? Is someone willing to buy my call from me (I know I theoretically I can sell it, but is there much of a market for that kind of situation? Or at that point do I have to exercise the option to lock in the profit? I know this may be a rookie question, but hey, I'm a rookie. Thanks for the help! -- Matt H.

Matt, please understand -- you are not in the business of holding your in-the-money calls -- you're in the business of

making money


What you should do is set a GTC order one or two points above your cost basis -- take your profits and move on.

Remember: You are in-the-money, meaning you are moving dollar for dollar with the underlying stock. Once you get to beyond your strike price, you want to capture the move, thereby taking your profit as soon as you can. In this fashion, you will most likely be able to play the same option many times. Bottom line -- you do not want to wait around to sell your winner -- take it when you can!

Again, make sure you have a GTC order in so you can capture your profit when it comes. Unfortunately, profits can disappear just as fast as they come.

Best, Nails


life is a journey, enjoy the ride!

At the time of publication, Dykstra was long Amgen and FPL calls.

Nicknamed "Nails" for his tough style of play during his Major League Baseball career, Lenny Dykstra was an integral member of the powerful Mets of the mid-1980s, including the world champion 1986 squad, and the Phillies in the early 1990s.

Today, Dykstra manages his own stock portfolio and serves as president of several of his privately held companies, including car washes; a partnership with Castrol in "Team Dykstra" Quick Lube Centers; a state-of-the-art ConocoPhillips fueling facility; a real estate development company; and a new venture to develop several "I Sold It on eBay" stores throughout high-demographic areas of Southern California.