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Rob, well, sort of and not exactly. Selling the put means they could "put" those 1000 sh. to you theoretically any time. Now that is unlikely until and if they sell at a discount to the intrinsic value. The risk on those 10 puts is the same as the risk of owning an extra 1000 sh. except for the premium over the intrinsic value. You get a premium in exchange for limiting your maximum upside. First, you have to understand options at least fairly well, secondly,consider your opinion of the stock and decide what you want to accomplish, then look at the option prices and see if there is an opportunity to obtain your goal. Here is another strategy that looks interesting to me and will get you thinking. [Again, not a recommendation, you have to tailor it to your goals and opinions.] Lets say, I have sold 1/2 my SFE position on the way up, think SFE is going to be in a wide trading range, wouldn't mind owning more, and want to take advantage of the high premiums. Currently long 1,000 SFE. Sell 10 Aug. 115 Calls for $$9 [$9,000]. Sell 10 Aug. 70 puts for $8 [$8,000]. If SFE closes the Aug expiration between $70 and $115, you have made $17,000 [minus commiss.] and the call and put expire worthless, which is what you want. What if SFE closes at say $130? If you do nothing, it gets called away at $115. Since you have collected $9 on the covered call and $8 on the put [which expires worthless], your effective selling price is $115 +$9+$8 or $132. In other words your upside is capped at $132. What if SFE closes at $60. In this case, the calls you sold expire worthless, and the extra 1,000 sh. are put to you at $70. But you received $8 for selling the put, and $9 on the call, so your net cost of buying the extra shares is $70 -$9-$8 or $53. In sum this strategy is net profitable between $53 and $132. I happen to think this is a good strategy right now because the premiums are plumped up as a reflection of SFEs recent volatility. [About a 75% annual rate of return if SFE closes between $70 and $115 not including any appreciation on your original shares you would get up to $115]. If called, your return would be around 48% for just over 3 mo.] If you are wildly bullish or extremely bearish or would not be willing to buy the extra shares at net $53 and not be willing to sell existing shares at net $132, then you would choose a different strategy. That is why you have to choose a strategy that is tailor made for your outlook and situation. [personally, I think an appropriate option strategy will yield more $ than any direct benefit from being a participant in an ICG offering- even though it is not an either/or proposition] Mike |
