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The Membrane Domain

Spring Cleaning and The Stock Market

Since it is Summer I did a little housekeeping. I rearranged furniture and vacuumed, all while humming that song they whistled in Bridge over the River Kwai. Although I didn't go so far as to alphabetize my albums, I did throw out old magazines and even dusted in my fit of Spring cleaning. Then I went into the kitchen and looked at a veritable glacier of dirty dishes. A man's got to know his limitations, I said, and turned back around. Besides, there's always next Spring (or Summer, depending on procrastination traits).

The stock market has its version of spring cleaning called "window dressing." This is at the end of the quarter when mutual fund managers divest of various holdings to make their holdings look different in their reports. I also looked at the monies I manage, with the more autumnal idea of separating the wheat from the chaff. There wasn't any chaff to speak of, but in the coming months, there is a significant enough possibility of a correction for me to "play it safe."

One conservative strategy is "covered call writing," which means we SELL options. There are those who blanch in fear at the mention of options, since buying options is just a bet on the movement of a stock. But, just like Vegas, it's the betters who usually lose, and in this scenario, we would be "the house."

The prices are the "real" net values to the client, today. These prices fluctuate, so take that into account before acting. Say I was your broker (now say it again) and you paid $17.85 per share for stock in IMP (NASDAQ: IMPX), a small but profitable firm that makes widgets for highflying Iomega Corp. But, since there is a lot of volatility and uncertainty about the future, we want some protection. So, we sell the July 20 "call" options and receive 1.97 per share. Like I said, we are going to SELL the option and RECEIVE money; like buying a car and selling the spare tire. If the stock goes up and stays over 20 by July 19, you will have to sell your stock at 20, and thus receive $19.60 per share. If the price remains close to where it is and there is no change in the fundamentals, you hold the stock and keep those monies received. That's no big deal to a long term player who intended to hold it anyway.

 
Here's how it looks on balance:
 
 Spending, per share     Income, per share	
       
      17.85(stock "buy")  1.97(premium from option you sold) 
                   	  9.60(stock "sell")
------------------------------------------------------------------
Total 17.85(spent by you) 21.57(received by you) 
                               a gain of $3.72 p/s

If IMPX goes above $20, you will net about 21% in roughly eight weeks. If it doesn't, you have received the equivalent of 11% of the value of your investment. Either way, it crushes CD rates. If the stock drops, you have $1.97 downside protection.

Is the hand really quicker than the eye? No. This situation is not common, but it is not sleight of hand, either; anomalies like this occur daily, and options are not the exclusive domain of the foolhardy. Consider that for every gambler, there is a vig. It's all a matter of which side of the equation you are on: as the gambler who bets, or the house taking his money. This is not financial alchemy!

Here's an analogy:

When manned flight was first developed, it was widely believed its only use would be to speed up mail delivery. But, it has since been adapted for travel, space exploration, crop dusting, and yes, mail delivery. Options are not new, and for anyone to pass it off as Wall Street voodoo means he may be leaving a lot of money on the table.

Martin Dekom is a stockbroker with the money management firm Profit Management Associates, in Atlanta. He can be reached at (404) 320.7620, or by email at MDekom@aol.com. This is an aid to your due diligence, not a substitute; you are solely responsible for your decisions.

Martin Dekom is a stockbroker with the money management firm, Profit Management Associates, in Atlanta. He can be reached at 404.320.7620, or by Email at MDekom@aol.com. His column is published on the Internet, in The DeKalb Champion, and The Stockbridge Advertiser.

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