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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Don Earl who wrote (6024)	2/11/1999 6:38:00 PM
From: Freedom Fighter	Read Replies (2) \| Respond to of 78531

Don, >>I'm not sure if you are into math or calculating risk/reward factors, but your strategy is absurd. Stock plus puts = $27 or $1.85 gain in four months, IF the deal goes through. That comes to a little less than a 7% return. If the puts expire worthless at $25 the loss comes to 8%. You should be able to get around 5% on a six month FDIC insured CD WITH NO RISK AT ALL<< You are missing the percentages of each event occurring. The cost of the stock + puts was 26 15/16 for me. The deal price is 28.85. This is 7% +/- depending on the number of shares and commissions going out 4 months. But it is over a 3-4 month period in which the deal will probably be closed and you will have the cash. So the return MUST be ANNUALIZED. That makes it approximately 21%. I had calculated it at my commission level at 19.3% annualized. If the deal does not close by then but is still on, the gap between the current stock price and the ultimate 28.85 will be narrower as that date approaches so the return will still be significantly above cash returns. Remember, the 2 point of profit already includes the money spent on the put at a loss. The downside is the probability that the deal does not occur at all. I say that is about 10%. If I earn 19+% annualized 90% of the time I am fine if the downside is that I own an undervalued security the other 10% of the time minus the 1 point I gave up on the put. The net return of a series of transactions like this is still in the upper teens percent. You also assumed that if the deal does not go through that the stock is automatically at 25. That will probably not be the case since the stock has traded above that level all along prior to any deal. Wayne