Stan, in that scenario I presented, the call seller would write LEAPS for 2002, so that would be 50% gross over 2.4 years (you do the math for the yearly average :). Here is a more detailed "playout". NB: I've never written a call; this is just a scenario I'm playing out in my head (and on the computer screen). Therefore it may be incorrect in some respects and should not be taken as "expert" advice (or any other form of advice!).
I can understand that you would be shooting for a higher return, and as someone who has obviously put some time into learning the Rambus story, your confidence may be well placed. The call writing position is a different angle, though. It is actually pretty conservative. In fact, if I were a widow or an orphan, I might just consider it! I only have experience buying (to open) calls; I have never written any, even though that's what loads of books say the smart money does. The point in this case is, if I pay, say, 10K for 100 shares, then write a 2002 LEAPS call against those shares and receive 5K in return, I'm in a pretty good situation:
1. I own 100 shares, and agree to hold them until I close the position by a) buying back the call; b) getting "called out" cuz the price has risen above the strike price between now and expiry; c) if the price is not above the strike price by expiry, the contract expires and I'm home free with that 5K, plus I've still got 100 shares.
In case a: Let's say RMBS goes to 150 by next April. I've now decided it's a "lock" (i.e., in April, I and the market are 50% more "convinced" than I am right now that RMBS is going to "arrive"). Well, I can take that 5K that's sitting there, add another 10K, and buy myself another 100 shares. For my original 100, I'll be paid 10K (what I paid) sometime probably close to expiry in Jan 2002. But now what I've done is pick up a second 100-share lot for a fresh 10K, plus the 5K premium I received on the call sale. In other words, in April, when I buy that second 100-share block, I'm effectively paying today's price (when I add in the 5K premium), even though the stock's more valuable. What have I "lost"? Well, my original 10K is now "dead money", but I don't lose anything on it. And that 5K I got helped me buy the second 100 shares for the original 100-dollar price. Alternatively, if I'm still kind of uncertain, I could sell another call on the second 100 shares, this time receiving, say, 8K for a Jan 2003 call striking at 150. In this case, what has happened?
1. I paid 15K for the second hundred shares.
2. I got a 5K "discount" from the first call sale, lowering the "buy-in" to 10K.
3. After buying the second 100, I sold a call on that block for 8K, which reduces my buy-in to 2K.
Now, effectively, I've paid 10K for the first 100, plus a (discounted) 2K for the second 100. So my total committed capital is 12K. However, when I am "called out" in 2002 for the first 100, I will receive 10K, and then (assuming RMBS goes up and up!), I will be called out again in 2003 for the second 100, at which time I will receive 15K. How does this add up?
10K for first 100
15K for second 100
= 25K
minus 10K paid for first 100
= 15K
minus 2K paid for second 100
= 13K PROFIT!
That's off of only 12K committed! I just doubled my money the easy way! If the thing keeps going up, I can keep buying more shares and selling more calls. As long as I'm getting almost a 50% premium, I've got a good chance to make money.
OK, running out of time to play out more scenario, I'll try to add more later or maybe someone more knowledgeable can rip it apart and set me straight! <g> Greg |
