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Technology Stocks : Rambus (RMBS) - Eagle or Penguin -- Ignore unavailable to you. Want to Upgrade?

To: astrophysics who wrote (47948)	7/26/2000 10:29:54 PM
From: Fiscally Conservative	Read Replies (1) \| Respond to of 93625

"Unfortunately,the next exp. date isn't until Jan 2002. That seeems to me to me to leave plenty of time. Unfortunately the highest stike price I see for then is 65. With premiums~45 and a stock price~75,there's mot a lot of leverage here." But then again one will still make money holding into exp. The smart play would be to trade the leaps. Greed is the essential ingredient in financial disaster. You might want to consider a spread play over a few months to optimise your entries. Next year may turn into a category 5 Hurricane for all Bulls leaving the only the Bears to pick through the litter-be careful

To: astrophysics who wrote (47948)	7/27/2000 1:39:27 AM
From: MR. PANAMA (I am a PLAYER)	Respond to of 93625

I am looking at leaps as well. Hoping that the stock trips a bit lower for a week to grind down the premiums on the calls. I have all the time in the world and leaps are way I may make a very reasonable return over the next few years. GNET option holders have cleaned up after the news. That stock was wasted and those who were brilliant enough to load up after the stock sold off on great earnings are much much more prosperous for it. AMZN is another situation that is worth observing as well. Let the mkt grind the premiums down .....leaps may pay off big. I do not care about the next two qtrs here but if they survive the next year ....it may be a terrific situation.

To: astrophysics who wrote (47948)	7/27/2000 8:30:57 AM
From: GVTucker	Read Replies (1) \| Respond to of 93625

astro, RE: If that's the way things play out Jan 2002 calls look attractive. Strike of 85 for a premium of 35 seems like a reasonable play to me. However, I worry, that if there's some unexpected delay, then it's possible that those might not pan out to well. Unfortunately, the next expiration date isn't until Jan 2002. That seems to me to leave plenty of time. Unfortunately, the highest strike price I see for then is 65. With premiums ~45 and a stock price ~75, there's not a lot of leverage here. There are lots more strike prices than that. For RMBS Jan 02 LEAPS, the symbols are as follows: Strike prices 32½ and below: WWO 35-57½: YUX 60-82½: YOW 85-110: YWR 112½ and up: YUJ As you can tell, there are plenty of opportunities for as much leverage as you want. That said, with the volatility in Rambus LEAPS in excess of 100, I cannot see the logic in buying a LEAP for Rambus instead of margining the stock. (Well, actually, I can't see the logic in going long Rambus in any fashion, but that's for another post.) Loopk at the example you gave: Buying an 85 Jan '02 call for 35 (which was indeed the actual offer price yesterday). Buy 1 contract for $3,500. All of this money is time value, none of it intrinsic value. The option depreciates over 1½ years, or a cost of $2,333 annually. If you buy 100 shares at 50% margin, it costs $3,750, with an equal amount of margin debt. At a margin cost of 8% (I can borrow a decent amount cheaper, it might cost you a ¼ point or so more at most), that debt costs you $300 annually. So from a cost standpoint, margining RMBS makes far more sense than buying the LEAP. Now let's look at the reward. On the downside, the LEAP goes to 0 at any price under 85. Your margin equity doesn't go to 0 until the stock goes to 37½, and you won't even get a margin call until the stock goes to 50 or so. On the upside, if the stock, say, doubles from here, your call would go from $35 to $65, less than a double. Your margin equity, however, would go from $3,750 to $11,250, a return of 200%. Finally, if the stock doubles after Jan '02, the LEAP holder does not benefit. The margined stock holder would benefit. The ONLY situation that the LEAP holder comes out better is if the stock first drops 50%, wiping out your margined stock, then quadruples from there, all in the next 1½ years. It seems to me that one situation isn't worth sacrificing all of the rest of the benefits. If you're willing to take the risk of buying an absurdly priced out of the money option on a highly volatile stock, I cannot fathom a reason why you wouldn't want to just buy the stock on margin instead. Bottom line, you have to pay (and through the nose) for this extra volatility when you buy the LEAP. Your margin debt cost does not change no matter how volatile the stock.