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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Wyätt Gwyön who wrote (5622)9/11/1999 1:16:00 AM
From: StockHawk  Read Replies (6) of 54805
 
Options play on RMBS - For a bit of weekend entertainment, consider this: RMBS closed today at about $92, so you could buy 100 shares for $9200. Lets compare buying 100 shares with an options play where you also buy 100 shares but in addition sell one call and one put.

After you buy the 100 shares you could sell a Jan 02 covered call with a $90 strike price. That call could be sold for $43 which would bring in $4300. You could also sell a Jan 02 naked put with a $110 strike price, currently priced at $45. That would generate $4500 cash.

After buying the stock for $9200 and taking in $4300 and $4500 your net cash outlay would be $400. In the best case scenario RMBS would be trading for more than $110 per share in Jan 02 (that represents a 20% increase over today's price). In that case the put would just expire and your 100 shares would be called away and you would receive $90 per share or $9000. Thus generating a $9000 return on a $400 investment in two and a third years. (If you had just bought the stock think about how much it would have to increase to get this kind of percentage return?)

Alternatively, if the share price of RMBS does not appreciate over the next two years and the stock is selling for $90 in Jan 02 then the call would just expire but a second 100 shares of RMBS would be put to you at $110. You would have to shell out $11,000 to buy that 100 shares, thus giving you a total of 200 shares which you could then immediately sell for $18,000 (200 x $90). In this case the $400 you invested would have grown to $7000 (18,000 - 11,000) even though the stock went no where. (If you had just bought the stock you would have no profit here - actually a small loss: the share price went from $92 to $90.)

With this play you can make money even if the price of RMBS declines. The only way you can lose is if RMBS is trading below $57. If it is trading at $57 you will still have to buy the second 100 shares at $110 which again is $11,000 and then you would sell your 200 shares at $57 per share and take in $11,400 just covering your costs. (If you had just bought the stock you would be looking at a $3500 loss here.)

StockHawk

PS. While several people did express interest in seeing options discussed here, I know several other people said they did not wish to see posts discussing options on this thread. I therefore saved this for the weekend and put "options" as the first word in the post so that it could be easily skipped by anyone not interested. I trust no one will be offended by this.
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