mthomas
<<Brent, your worst case scenario fails to account for your liability to buy those 2000 shares at $30, even if the price dropped to $10 by April 22, 2000. >>
No it doesn't.
The worst case scenario is that I am long GBLX @ 29.25 (I am forced to buy the stock @$30 but I sold the puts for approx .75 more than the calls cost)
If you bought the stock when I did my option transactions I would have been long at $26.25, so I really am only risking 3 points more than buying the common. If you place a time value on money, I saved 7 months of interest on $26,250. (which is approx $1,225 (at 8%), so I really only paid a premium of 1.775 to own the stock). I didn't have the money to buy it then but I knew I would in April.
Enough of the worst case scenario, lets talk about if I'm right. Then I get to buy the stock at $25 in April. I don't have to pay margin interest on $52,500. And I get to pocket $1500 in the mean time. Plus when you buy stock you have to put up at least 50% of the buying power, when you sell options you only have to put up 30%, so there is a less chance of getting a margin call.
I knew GBLX was going to have a good portion of its network open by the 1st quarter of 2000, spin offs were coming (take a look at EXDS to show you what potential Global Center has, not to mention Asia Crossing), everybody was saying this would be a $75 stock by April, I agreed and took a chance. My only regret was that I only did 20 of them instead of 70. If you know what you are doing, options are not risky (I only risked $1,775 more than buying the common). Right now you can sell the Jan 2001 60 put for 16.25 and buy the 50 call for 16.75, worst case scenario in a year from now you own the stock for $60.50 a share. Best case scenario you pay .50 for Jan 50 calls. If you believe this stock will go to $100 and split and keep running, it is a nice way to beef up your returns. |
