Refining my options

Time for idea stealing time again.

I have watched the refiners, shippers and banks fall off a cliff the past few months... just to name a few sectors.

I have also contemplated buying a few times. Then one of my frequented blogs comes up with one of the companies i have done some quick research on Tesoro. Now i have looked at the numbers, compared it to Valero, Sunoco and a few others and know that when oil falls refining margins 'should' get better.

This blog post highlighted some things that i didn't know about Tesoro and its growth prospects. Now if oil prices continue down or remain stable, this i don't know, Tesoro should be a good hold for a few years.

I figured that now would be a good time to look at my 'options' and see what i can do besides just buying shares at todays price.

My first thought was to sell puts. Selling a Jan put with $12.50 strike yields 10% minimum (on initial purchase price) in 2 months with the price staying above $9.7. If it goes to $12.50 i just got $3.7/share for free or 38% of todays $9.7.

A Jan call for $5 strike is $5.2. So anything above $10.2 is all profit and anything below i will have a small or large loss. I get 2-1 leverage with this idea, but it doesn't merit the risk to me since i doubt Tesoro will fall another 50% from here.

I like the Jan '10 calls a little better. $5 strike is going for $6.2, but offers another 12 months of time. Slightly less than 2-1 ratio. If i wanted to buy 200 shares it would cost almost $2000. By using this call option i can control 300 shares for less than $2000. The 4% dividend is not enough incentive for me to buy the 200 vs controlling 300.

For the additional 12 months my time cost is $0.085/month. If Tesoro reachs only $12 by Jan 2010 my return on 200 shares is 28%. Not bad but what happens if i controlled 300 shares.

I lost the $0.40 dividend (which was taxed as income in Canada anyways), but my return was only 12.9%. Hmmm how about $14? 48% for owned vs 61% for controlled. As you can see the breakeven for this trade is around $13.5.

I think Tesoro has a good shot of being $20 or better. The margin gets better as the price goes up. At $20 the return is 110% owned vs. 142% controlled.

read Randolph's blog, from my favourites, as to why you should like Tesoro at these prices.

D

put it to the man!

Here is a free tip from Warren Buffet.

Go to Sedar and read what he does. That's it.

Oh and for a laugh read his annual letters @ Berkshire's website. Note the frills and gimmicks that this site offers!

What i am referring to is Warrens most recent action. He has been selling puts and lots of them. Now why would anyone 'sell' puts in a bear market you ask? Easy.

He as always is confident in his assessment in a company and bets just so. Instead of just paying market prices for Burlington Northern he just sells puts. Now he is getting these shares for less than current price.... or he just made some quick money with no money.

Now i don't have much money left to play with. I am in the same situation that Collectors Universe and Connacher Ceo's were recently. Well not exactly but i may as well be. Prices are so low and continue to fall. My wife is scared out of her wits and so i agree to remove half money (which was in cash anyways waiting for cheap deals) and put it on the mortgage. Hmmm. Don't you hate it when outside of the market forces effect your decisions!

Anyways to make my point, if you find companies that you deem cheap why not look to see if selling puts on them could lower your price even further?

A few final thoughts. This has been a brutal month. It was only a few % and days away from being the worst month for the markets in the past 100 years. Sept 1931 will still stand for now as the late October rally stands. Horrible no good very bad market. To say this market is bad would be just slightly understating it.

I would like to put some money in the market by borrowing against my home equity. I am, or should i say my wife, not quite comfortable with this idea yet. One company i have on my radar is akt.a. This company is still making money with no debt, several dollars per share in cash.

I am part way through 'Common stocks uncommon profits' and find it a very intriguing book.

to be continued. ..