"...To the thread. What is value? In my mind it is when potential return significantly exceeds risk...."
Interesting question! I went to the investing books and looked for a clear definition to give you. And didn't find just one. Under "Value" in the index of Security Analysis I found: appraised, book, current-asset, going-concern, intangible factors of, liquidating, market; Value vs. price, relation to market price, standards of, stated.
On p.123 of the same book, it says: "The value of a business as an entity is most often entirely determined by its earning power."
So, I guess the definition of value changes depending on the context.
I used to be in the mortgage business and the "value" of a home was different for each of following entities: the real estate agents, the seller, the buyer, the appraiser, and the lender. For they were each approaching the issue from different perspectives.
In a hostile market(which is what I consider the current one to be), the definition of value, (as it applies to my investments) must include the element "margin of safety".
I don't know the merits or problems of the strategy you outline with WAXS. I did a NetNet analysis on it and arrived at a NetNet valuation of $6.06/share, with a negative FCF of -$1.53/share for a 9 month period. So, lets say WAXS went to $6.00 within your option time frame. You would deliver the 3000 shares at $5.00(strike price) making(lets use round numbers and say you bought the shares for $1.00) $4/share X 3000 = $12,000. You would have to buy 3000 shares at $6.00/share to deliver them on the naked calls, so that would cost $18,000. Therefore, on that transaction you would net lose $6,000. Assuming( for simplicity sake) that all other costs are a wash, then if I did this, the question I would want to know the answer to would be: " OK, that's the risk, what's the reward?" You say: "...Net cost $75 cash and margin set aside of $300.....".... If stock stands still for 2 years this is a 30 bagger...." 30 bagger of what money? If the stock stands still, you sell the stock for what you bought it for, less commissions, and you get to keep the options premiums, so were the options premiums 30 X 75 = $2,250? if so, is risking $6,000 to gain $2,250 a good risk? It wouldn't be for me. I would invest $6,000 to gain $2,250 on that investment, but I would insist on firmer fundamentals.
It's an interesting play, but not for me. |
