Option Purchase to Open DLQRE

Today we traded like an amateur. Last night we placed a market order for the June 2006 $25 put option on Dell Inc. (DELL), and it was purchased just after the opening bell this morning at the peak-high price of $1.15. DELL opened at $24.64. That means the instrinsic value of the option at that time was $25-$24.64=$0.36, which we paid $1.15 for. Not a good deal at all. Moreover, on a day of heavy trading the stock closed up at $25.20, meaning we are now out of the money. So why did we purchase this option? Good question. The short answer is that we acted emotionally, and didn’t stick to the system. Longer answer:

  1. After the closing bell yesterday, Dell announced that it will fall short of hitting its first quarter profit target.
  2. The stock is already down-trending, according to the 30-day moving average.
  3. The stock is in a down-trending industry group (Technology/Computer Hardware).
  4. Weak to average fundamentals.

What did we learn from this? Kind of early to say – let’s see what happens in the next few days or weeks. Fortunately we didn’t invest as much into this speculative buy.

Other notes for future reference:

  1. Dell stock fell 5.8% to $24.90 on Monday during after-hours trading after the announcement. So a fair amount of trading already occurred after the announcement and before our option purchase.
  2. Today’s volume on DELL is 84M, average is 25M.
  3. Today’s volume on DLQRE is 13,333, open interest is 23,898.

There is one thing that we learned from this so far: Be cautious when placing overnight market orders for securities that may be in high demand. The price you buy it at may be temporarily inflated by the demand. In this case the $1.15 price is the current all-time high for this option.


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