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TRADE #41 - Buy WDMG (QQQ Jan 06 $33 Put) 200s @ $3.00 in Roth IRA

Contributed by mm | April 15, 2004 1:59 PM PST

I made another round of bearish investment this morning and got 2 contracts of WDMG (QQQ Jan 06 $33 Put) in my Roth IRA account at $3.00/share. Thanks to a commission charge of $23.50. My actual cost basis is around $3.12/share. Believe me, I never want to have 3% trading cost in my investment. I actually put an order of 8 contracts but I only got the order partially filled.

Aside from the little disappointment of the transaction cost, I'm happy about the fact that my portfolio is moving to a more defensive structure. As you can recall, since January I have been collecting long-term put options (trade #36 and trade #38). With today's trade, my put positions not value at $5,680 at today's market close.

Compared with my last option play YWZMD (QQQ Jan 06 $37 Put), WDMG is somewhat riskier because I need approximate 17% drop in Nasdaq by 2006 to make it break even. But actually I choose this purposefully. I looked at the full spectrum of the Jan 06 LEAP put options, and calculate the percentage drop to double the money, and between striking price of $33 and $43, every option is priced to double once QQQ falls by 25% to 26%. My decision to choose the low end of the range is solely based on the likelihood of most gain percentage wise, as I am very convinced that we are going to have some big market correction in the years ahead.

A final note: WDMG is closing at $3.20 by market close with a volume of 22 contracts. Besides my 2 contracts changing hands at $3.00, the other 20 contracts were all traded at $3.20.

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