Clappy, Here is my thinking on this, see what you and anyone else thinks:
I read the article and the way I understand it, you would be financing the cost of the DIM leap call by writing short term calls. The calls sold would generate (per monthly sale) enough cash in aggregate to pay for the time value of the leap by the time you would exercise.
In a nutshell, you would be putting on a bull calendar spread each month. The upside risk is you get called on a sharp upward move in the underlying and would be forced to exercise the leap with all that time premium still in it. You would want to buy back the short call before exercise, and then sell the leap at a net profit, but this would defeat the purpose of financing the leap long-term. The downside risk is just like a covered call with the DIM leap at 0.
You could calculate the cost of doing this with common in a margin account:
50% marginable INTC @ 79.25, financing 39.625 at 7% for 24 months cost is $5.54 (simple non compounded interest). You could then do the short calls as suggested (5.54/24) to pay for the margin loan. Note the cash outlay of 39.625 is less than the 54.25 of the leap, so the return should be greater. The risks are similar because you are using DIM leaps. However the common has a delta of 1.00, and the leaps can only get very very close.
I myself would rather use a synthetic long position constructed of long calls and short puts. Although the puts sale will not cover the entire cost of the calls, it will reduce it substantially. Writing short-term calls to cover the difference could actually pay for the entire position (except put assignment risk), so long as the stock goes up but not too suddenly ;) And of course the puts would lose value as well, further reducing risk and the cost of the position over time, in the happy circumstance described.
I actually established a synth long in SUNW, as follows:
short puts 03 105 @ 26.00
long calls 03 105 @ 40.50
Net debit is 14.5, I have about 29 months to cover it:
14.5 / 29 = .50 per month to pay for position (not counting any beneficial short put value decay), but of course the put assignment risk is still present should SUNW get ugly.
I am willing to take that risk, as I think SUNW will be higher than strike 105 + net debit 14.5 = 119.5 by 03.
I think the main difference between these positions (DIM, common on margin, synth long) is leverage, and DIM position risks a bit less than the other positions.
Thoughts? BTW, I just got done with a major weekend-long network upgrade at a client, so I'm still a bit punchy. If this post reads dumb, please forgive.
hivemind |
