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.

musings

I have dumped PNSN after a nice gain. I almost and should have deployed that capital into San gold resources, which i told a friend i would buy below $1.5 if the opportunity rose. Well i am a liar. I watched it touch $1.35 and did nothing. Now its $1.6 ish.

I have also added Aldila to my watch list. It is a unique company which i have used their products and like. I stumbled upon it using some new screens available on google finance. Has good cash flow and a pretty balance sheet. Company has a product with some moatish properties, but this US economy could hurt earnings.

CLCT is almost break even for me after my average down and latest dividend payment. CGS and BVF not so lucky.

As the market volatility continues so does my lack of buying options. Too much volatility premiums for me... but not enough for me to write covered calls and justify the risk involved. While i pondered it with PNSN i am still toying with the idea of writing calls on bvf. I wonder how long they will pay the dividend with their new strategy of growth? I suspect '08 will be the last full year they payout nice dividends if any? Dividend policy is too big a cash burn.

A friend is buying MGM and LEH. While i continue to look for balance sheets and business's i can grasp he continues to speculate. He has more money available to lose than i (he has no mortgage, wife or kids). We both owned shares of CGS (last we talked a few weeks ago) which is my spec asset play.

Some article i read said Canadian western bank was the best of Canadian banks to own now. I don't agree and seeing house price's slide in Alberta adds to my pessimism. Now that i have recently bought a newer house and dramatically increased my mortgage i take notice of these headlines more.

While i have no illusions that my house can't fall in price i was heading into this purchase half expecting it. I was already in the housing market so i was destined to lose anyways. I am not planning to flip and i have 50% equity, at current levels, in my house. Amortized at 15 years its comfortable, but i still dislike debt all the same. I wish my wife had this same disdain for debt?

One last company i am looking at is liquidation world. Its very thinly traded and in a sector which stands to suffer if downturn gets worse. But another value investor i follow, see CKI-T, bought and seems to like the story? I continue to watch with interest.

Seth Klarman is another investor i have been reading about. Interesting stuff.

I have done less market watching than normal since my daughter was born last week and likely will continue this trend for a few more months.