>> 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.
Yes, but for Jan 03's? I didn't find the above 65. Am I missing some?
> 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.)
My logic is that my little investment in Rambus has turned into my second biggest holding. My guess is that in a few years Rambus will be priced either much higher or much lower than now. Buy buying LEAPS I could still make a handsome profit if it soars like an eagle, yet still maintain some of my profits if it dives like a penguin.
> 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.
Hopefully the stock will rise significantly and more than off set the lost time value. If it pluments to virtually nothing, I've loss less than if I held the same number of shares. I come out behind if Rambus stays somewhat close to where it is now. That's what I'm thinking is unlikely.
> 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.
However, if Rambus falls, then I have to pay back the margin debt. I'm not in a position where I want to take that risk.
> 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%.
That close to a margin call is unacceptable for me. And I'm hoping for more than a double :).
> Finally, if the stock doubles after Jan '02, the LEAP holder does not benefit. The margined stock holder would benefit.
That is the real risk that I'm somewhat concerned about.
> 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.
Or if the stock drops significantly.
> It seems to me that one situation isn't worth sacrificing all of the rest of the benefits.
My guess is that we're in different situations. And what may make sense for you doesn't for me. But thanks for the suggestion. It is usefull to compare all the options, even if only to understand what other people might be doing.
> 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.
I can sell some of my RMBS for captial that I'm willing to risk. I'm not willing to risk having to pay back margin debt.
> 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.
I see your point. But it's not for me. If you have any other suggestions that don't invole margin, I'm still interested.
Thanks again,
astro |
