First, you have to start to study the price pattern of CSCO in the past 8 years , i.e from 1991 all the way to 1999. Just take the lowest % of appreciation of each year.
Based on last week's close, the year 2001 , strike price $130 leap is about $26,
with $10000 , you can but about 400 shares, which will expire in Jan 2001.
say, if CSCO appreciate 100% every year in the next two years, and we assume two
more 2:1 splits down the road before Jan 2001, then by Jan of 2001 , you should have 800 shares at $100, and your cost is $32.5 split adjusted, so if you sell all your shares at that time, you can generate a total cash of ( $100 -$32.5) *800=$52000,
and your net profit is $42000. Say, if you bougt stock, with $10000, you can buy
100 shares at last week's close price , and your net profit is ($100 - $25) *400=$30000. So, the difference is $22000. You may roll up to 2003 , Jan call
in Jan of 2001, and at that time , if we assume the price of call is still around
$26 for Year 2003, $130 leap, you can buy 2000 shares, and you can calculate your profit based on different % of appreciation in stock price per year till Jan year 2003.
You may sell 50% of your leaps in Jan of 2001 , and use the cash generated to exercise other half of you leaps and hold the stocks for long term ride.Or, you can exercise part of your leaps , and use the rest of the cash to build additional leap positions for year 2003.By doing this year after year, you will gradually build up
your position on CSCO with the original $10000 invested. Of , course , this strategy will not work unless the stock is a long term growing one. |
