Hey Nigel,
I just got some email from Rob regarding your question. He also
stated that I confused him. Well, I must have screwed up that trend
of thought. I hate to do that. So, let me show you what I wrote back
to Rob.
I reviewed your question and checked my calculations. There is a
certain amount of guess work. But, I don't think the outcomes are too
different as far as I can tell. Check my logic here! It may be right
in front of my face.
Original statements:
|A move from $8.00 to $10.00 (25%) overhead price resistance is not
|out of the question at this point for CS. I really like the CS LEAPs
|for this stock. With a upward price move pending a WINs approach
|might go as follows:
|Buy 5 to 10 CS 10 JAN01 LEAP @3 and |wait for a price raise of say
|$9.00 before writing the |spread selling (CCing) 10 JUL CALLs @ 1
|3/8+. At 1 3/8s estimated value would |generate a |46% rate of
|return against the LEAP surrogate (cost $3) you used for the call
|($1 3/8).
|Another $2.00 (25%) on the stock if the CC is exercised and you are
called out. A cool 71% in 5 |months time! Hummmm? I |may just sell
some BTGC CCs to raise the money to do this CS play. |Looks
interesting!
ANSWER:
The 2001 is a LEAP CALL with a strike price of $10 @ 3. That entry
is being made with the expectation of CS moving up to $10 before
petering out due to the overhead resistance. So, if you are called
out of your CCs against the LEAPs at $10 you only keep $3 and
exercise the LEAP to deliver the actual CS stock to your CC buyer.
You net $1 3/8s premie divided by $3.00 CS LEAP investment = 46%
return less commissions. So, I still believe that is accurate. The
point was to WAIT for a price increase before actually writing the
CCs for those LEAPs. In other words, to lower your nut!
If CS does pull back before the expiration date and the CS selling
price is below $10, the written CS July 10s CCs would expire
worthless and then you could write another round of CCs or liquidate
the appreciated CS long LEAP for say $9.50 - $9.75. After all, the
CS stock price was around $8.00+ when picked up the CS LEAPs @3.
Today, the CS LEAP is selling for $3.50 and the July 10s @ 1 1/2.
Of course, I can't predict the exact future outcomes, but, under the
conditions stated above that CS LEAP would cost more than $3 and
perhaps less than $4.25, so let's say $3.75. Add to the CC premie
$3.75 LEAP sold-$3 paid=$.75 profit difference to add to the 1 3/8s
for a total of 2 1/8s. Now, 2 1/8 divided by $3 =70.8%. Again, we
are playing "what if" as an objective strategy employing some WINs
rules.
Yes, if you only use the CS stock the ROI numbers are totally
different. That is why I'm really turned on by the LEAPs. They are a
goldmine!
I'm glad you are double checking and asking to justify my
calculations. Sometimes, I do get sloppy and I don't want to mislead
people or make major blunders. Thanks Rob! |
