Could you please explain what you mean by buying the April $40 puts in DS? I would imagine if you expect it to go to 26-27 that you would buy the option closer to the expected strike price. I'm having difficulties understanding the strategy. Please explain. (March 12, 2001)
The reason we were looking at the April $40 puts on DS is because those puts were in the money based on where the stock was trading, and those puts gave us a better delta so we would enjoy more movement in the option when the stock fell. If we bought out of the money put options at the $25 level, the delta would have been very low and we would not have made as much on the move that we anticipated and that is happening now. The play was to watch for its test of the 200 day MVA to fail and then pick it up on the fall. That is what has happened thus far.
Puts are traded on the same theory as call options, just the chart is inverted: buy in the money to get the better delta and thus better movement when the stock starts to sell off after trying to break resistance and failing, or after breaking support. With calls to the upside, we would look for support to hold and the stock to bounce or the stock to break resistance on high volume. We will cover this in depth in our seminars starting in April.
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