Does it look realistic?
This is where we get to the " giving advice scares the crap out of me" part. My ability to predict the future is really poor. My instinct is to say no, it does not look realistic, but that is more a reaction to your whole attempt to predict returns.
My starting point is that I own RMBS. I believe the legal issues will someday be resolved in their favor. I have no idea how long this may take, nor how many cycles of good news/bad news will be involved. I want to own the stock because good news can come at any time and move the stock an eye popping amount in a short time. I sell calls against A PORTION of my holdings because:
1. My cost basis is such that I can sell a strike price that would provide me an acceptable profit if the stock were to be called away. This is THE MOST IMPORTANT part of it to me. I personally only sell a call if the above is true. Period. No exceptions. Other people do other things. I don't.
2. It may take years for this to resolve itself.
3. RMBS may not prevail on the legal issues.
4. Premiums are reasonably good since RMBS is very volatile. This is the SECOND MOST IMPORTANT part to me.
If premiums stink, I wait. If they continue to stink, I wait some more. I don't have any preconceived goal as to what RMBS calls should return.
5. Bad news can come at any time, and from an unknown number of directions, and move the stock an eye popping amount.
Given the above, I then only sell against a portion of the shares, typically 1/3rd. If I am right and someone settles tomorrow and the stock goes to 45, I want to be in on some of that ride. When I first bought this batch of RMBS, I sold calls against a higher percentage of the shares-more like 75%-for a while in an attempt to create a cushion,and also because much of the purchase was on margin, which I'm not very comfortable with. I've now scaled back to the 1/3rd level, IF AND WHEN #1 and #4 above are ok by me.
In terms of realistic expectations, all I can say is that it depends on what you do and how it all works out. My history on RMBS, doing the dumb old plodding stuff I've outline above is as follows.
Invested roughly $13,500 in RMBS 2/2003. (900 shares)
Sold calls on and off through 4/2004 (14 months).
Had 400 shares called away, at a profit.(Cap gains tax due) However if memory serves they were called away around 20-25 and those shares missed out on the ride to 30s. Also, they were the most costly shares so that what is left is on the low end of my average purchase price.
Collected $2,260 in call premiums. (short term cap gains taxes due).
Still have $7,200 invested in RMBS (600 shares) including the 100 shares I mistakenly bought the other day. None of it on margin.
Currently short 1 May 35 call and 1 May 40 call, sold 4/13/04.
Figureing out the rate of return on the above is beyond me.
Predicting the future is also beyond me.
ARS |
