Mike, Incyte got whacked today for losing a lawsuit. I may repurchase some.
The options strategy is extremely risky, much more so than the author's note indicates. The problem is in thinking that a bloated trading sardine like this one cannot go below $57 over the next 2 1/2 years. Maybe it won't. But what happens if it does? Remember, we are talking about a co. that is earning less than 30 cents a share annually and where its biggest customer/backer/tout is being forced to offer alternatives and where Dell has tested their chips with real world applications and found them wanting. Hence, the huge time premiums being paid.
But let's give Rambus the benefit of the doubt. Say it triples eps to $1 a share by 2002 and sells at a current market multiple of 30 times eps. That produces a price of $30 per share. What happens with Rambo at $30 on Perspiration Day:
You earn the entire call premium of $4300. You earn the put premium of $4500. Nice so far. You get to buy a stock for $11,000 that you can now sell for $3000, so you lose a puny $8000 on that one. And, you own a stock you bought at $9200 that you can also sell for $3000. So, another $6200 hickey.
You have earned $8800 and lost $14,200 for a net net of -$5400. On a $400 investment, you have lost a mere 1350%.
O.k., I am a bear on Rambus, but look at it this way. Every dollar the stock is below $57 costs you $200 of losses, or 50% on your $400. If anyone thinks it can't get there, look at the chart. You would have lost 350% earlier this year. If you didn't use margin, you may have survived with a few gray hairs, but this stock is that volatile.
Part two to follow |
