actual options artical

Figured i should do a little number crunching on options for a change.

Since i am playing with less cash and my financial situation has changed (larger mortgage and less savings) i am not into taking big risks.

So this limits my options, no pun here, to what i can buy and sell covered calls on without commissions killing my 'possible' profits.

TLM, UUU, IMG, DML, PDN, ELD, LUN, S and TDG all came up when i tried to look for companies with recent moves down, optionable and in the under $20 club. My reasons here are simple. I want to limit my capital into any one trade to be under $2000 yet i need at least 100 shares of any company in order to 'play' with options.

I quickly eliminated IMG, UUU, ELD, TDG, and LUN because they were not offering as good a premium or hadn't fallin as much.

I liked TLM, DML and PDN best. All offered a one month premium/capital gain combination of about 6% (September expiry). All were fairly beaten up recently. I may try a TLM ($!8.42 close)covered call for $0.6 premium @ Sept $19 strike. DML and PDN seem more attractive simply because i can get 300 shares for the price of 100 TLM and write 2 more covered calls for only $1-2 added dollars.

DML would take in $0.3 /share for $6 Sept call. With 300 shares that would be $90 taken in less $14 commission. On TLM i would take in $0.6 * 100 shares = $60 - commission of $12. So using $1600 in DML yields $90 vs $48 in TLM on $1800. Of course TLM has the room to grow $0.6 without my shares being taken.

Maybe selling some BVF (100sh) and using PNSN profits ($1800) would free up the money so i could buy 200 DML and 100 TLM. Hmm i just thought about selling a put on these shares too... Will have to look at that for a double dip.

If i was into being risky i may be buying calls on S. Has a nice diversified portfolio and still has good earnings. Earnings were hurt recently by lower metal prices and lots of dilution to pay for acquisition's.

On a side note i played with the Manulifeone calculator to see what 'my number' was? Turns out according to Manu my magic number was $24000 and i could retire my debt years sooner. In small print however they mention some monthly fees for the account 'maintenance fees'. Hmm more fees?

I had to put my savings onto my debt for this to work. What i didn't calculate was my 'savings' is actually mostly invested (60% right now). So i assume Manu gave savings a small, if not tiny number for a return. So far they would be correct, but i hope to reverse this trend.

The way i see it i could dump all savings onto the mortgage and use the HELOC as an emergency fund if need be. I may do this if interest rates rise and my returns continue to disappoint, but for now i am content to stand pat.

Speaking of HELOC's and leveraged borrowing i read an article/speak by Seth Klarman which sorta struck a cord with me. Before this i had been gleefully watching the markets dive and debating using my new found wealth (new HELOC) to invest. I figured that cost of borrowing would be 3% in after tax dollars and a dividend (from CDN company) of 4% would take care of this leaving me with 'money for free'. At least that's what i reasoned.

Well after seeing the markets continue to slide and reading Klarmans speech i am happy to say i haven't borrowed a nickel to invest. Klarman reasoned if leverage is good then more leverage is better so where does it end? Does this sound like a made in US mess or what? He goes on to point out that leverage forces us to make poor investment decisions that become out of our control.

While the smith maneuver may be the argument for leveraged investing many logical reasons remain for the 'not to do this' camp. I figure i don't need the added risk to reach my financial goals and would just add unwanted risk to my plan.