Steve:

I loved your Double Texas article . How about NLY? You can buy a July call for less than two quarterly dividends.

Company

Price

JULY Strike

Price

Annual Dividend

Annaly Mortgage (NLY)

$19.16

$20 call

$0.75

$1.880

Thanks,--B

This reader's approach is certainly a valid and executable strategy, but there are a few things worth discussing: Double Texas -- the dividend reinvestment options plan mentioned in that column -- is predicated on foregoing steady short-term dividend income in exchange for potentially greater profits through capital appreciation.

In buying shorter-dated options, even if the quarterly dividend "pays" for the three- to six-month options, it doesn't leave much time for the calls to produce profits through a rise in the price of the underlying shares. In fact, you'll be facing the headwind of time decay, or theta, at a much earlier date. This could negate a good portion of the call option's value, even if the shares of

Annaly Mortgage

(NLY) - Get Report

move higher over the next quarter.

Another reason for supporting the case of longer-dated options, or LEAPs, is that implied volatilities, although beginning to inch up, are still pretty much at historically low levels. For example, Annaly options are currently trading at a 21% implied volatility -- this is not only below the current 30-day real volatility of 24%, but well below the 52-week high of 51% it hit last September.

Buying longer-dated calls would allow you to lock in as much vega (the rate an option's price rises as implied volatility increases) as possible at today's relatively low implied volatility levels.

Another strategy to consider (perhaps the flip side of the Double Texas), would be to use dividend payments as a means to buy put options on the ownership of dividend-paying shares. This would protect against any price decline (the put strike essentially sets a floor on the sale price of the existing stock ownership), but still allows for both participation in asset appreciation and the collection of the dividend.

That strategy, for which I have no known name but would love to hear suggestions, might be more appropriate for older investors looking to protect capital gains and rely on the dividend income.

Open Interest Not Always Open and Shut Case

Steve: A few days ago the open interest on the QQQ calls jumped dramatically without a pickup in volume. I first thought it was a typo, but they have not changed it on the CBOE Web site -- with that figure, the put/call ratio on the QQQs has dropped to 1.22.Do you know if this is correct, or if they just have not caught the "mistake"? --F

This email arrived on Tuesday, and that day I checked the volume and open interest for the QQQ options, which showed the put/call ratio on the

Nasdaq 100 Trust

(QQQ) - Get Report

to be 1.76, up from 1.47 at the beginning of January. Remember that most options are traded at multiple exchanges.

Much of the volume could have been traded at the International Securities Exchange rather than the Chicago Board of Options Exchange. For a complete picture, go to the

Options Clearing Corp.'s Web site. Since all option trades must clear through the OCC, its data offer the most comprehensive numbers and consolidated statistics.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

steve.smith@thestreet.com.