astro, RE: If that's the way things play out Jan 2002 calls look attractive. Strike of 85 for a premium of 35 seems like a reasonable play to me. However, I worry, that if there's some unexpected delay, then it's possible that those might not pan out to well.
Unfortunately, the next expiration date isn't until Jan 2002. That seems to me to leave plenty of time. Unfortunately, the highest strike price I see for then is 65. With premiums ~45 and a stock price ~75, there's not a lot of leverage here.
There are lots more strike prices than that. For RMBS Jan 02 LEAPS, the symbols are as follows:
Strike prices
32½ and below: WWO
35-57½: YUX
60-82½: YOW
85-110: YWR
112½ and up: YUJ
As you can tell, there are plenty of opportunities for as much leverage as you want.
That said, with the volatility in Rambus LEAPS in excess of 100, I cannot see the logic in buying a LEAP for Rambus instead of margining the stock. (Well, actually, I can't see the logic in going long Rambus in any fashion, but that's for another post.)
Loopk at the example you gave: Buying an 85 Jan '02 call for 35 (which was indeed the actual offer price yesterday). Buy 1 contract for $3,500. All of this money is time value, none of it intrinsic value. The option depreciates over 1½ years, or a cost of $2,333 annually.
If you buy 100 shares at 50% margin, it costs $3,750, with an equal amount of margin debt. At a margin cost of 8% (I can borrow a decent amount cheaper, it might cost you a ¼ point or so more at most), that debt costs you $300 annually.
So from a cost standpoint, margining RMBS makes far more sense than buying the LEAP.
Now let's look at the reward. On the downside, the LEAP goes to 0 at any price under 85. Your margin equity doesn't go to 0 until the stock goes to 37½, and you won't even get a margin call until the stock goes to 50 or so. On the upside, if the stock, say, doubles from here, your call would go from $35 to $65, less than a double. Your margin equity, however, would go from $3,750 to $11,250, a return of 200%.
Finally, if the stock doubles after Jan '02, the LEAP holder does not benefit. The margined stock holder would benefit.
The ONLY situation that the LEAP holder comes out better is if the stock first drops 50%, wiping out your margined stock, then quadruples from there, all in the next 1½ years.
It seems to me that one situation isn't worth sacrificing all of the rest of the benefits.
If you're willing to take the risk of buying an absurdly priced out of the money option on a highly volatile stock, I cannot fathom a reason why you wouldn't want to just buy the stock on margin instead. Bottom line, you have to pay (and through the nose) for this extra volatility when you buy the LEAP. Your margin debt cost does not change no matter how volatile the stock. |
