I have 2500 shs of HUN at avg cost of $6.04
I missed the opp to buy more cheap today.....I sold another issue late in day, but HUN already above 6.50 at that point.
I now have enough to buy 500 more shs of HUN, and hope to get it under 6.50 tomorrow or Monday, if we get another dip.
Why should I either buy calls , say AUG 7 1/2s and pay a buck, OR
why should I sell covered calls and risk losing my shares.
Here's my sentiment:
Economy a few months away from being on a definite uptrend, and chemicals have already begun the move.
HUN wants to be bought out. It will be even more desirable with a ton of cash which I believe they'll get from mediation.....say $3-5 billion minimum
I see HUN as a $30 value to me within 10-15 months
If anyone has a strategy how options can fit that overview of my sentiment, available cash to buy, and present stake and avg cost, please advise.
Thanks in advance
If you really believe in your scenario, the best payout is with a risk reversal strategy:
buy out of money calls (let's say 7.50) and sell puts (let's say 5.00). his way, your put sale pays for a good part of the call purchase.
Yes that is exactly right! Another approach which is slightly more consevative but offers a lot of bang for your buck is to buy the 7.5 calls and sell the 12.5 calls. This is particularly attractive if you expect a $4 or $5 price increase rather than a $20 dollar one
August $5 options are $2.10 per contract so you could pretty much triple your buying power over your buying 500 shares of stock. If you really believe in the stock, you might want to use that, you're paying about a $.50 premium and buying enough time for the trial to be over. However if the stock hits $12 say, your gain on 3 times the amount of stock more than pays for that premium.
I am not sure where the other posters learned math (or if they just decide that it is not worth applying what they learn to anything), but if you believe what you said, you should sell all your HUN stocks and buy HUN calls. I will demonstrate with numbers later, but there are many factors you have not covered that should also be taken into consideration (when you think the settlement would come, whether you are trading on margin or not, what is your risk:return profile, will you need any of he money that you have discussed over the next 3, 6, 12, or 18 months, what assumptions you make about how much litigation is already factored into HUN's price [which influences how much HUN will rise or fall after a settlement], etc.).
Here's a simple example using $1000 and its eventual value in several different HUN investment strategies: 1) HUN stock (non-margined), 2) HUN stock fully margined with a 30% margin requirement, 3) August $7.50 calls (about $1.10), and 4) November $12.50 calls (about $0.50 today).
Assuming away commissions (as not making that much of a difference in this illustration):
1) you can buy 151 HUN shares at $6.60 and make about $14.40 per share if the case is settled at $4B (the average of your lower and upper bounds). Profit = $2,174+ . . . not bad for an investment of ~ $1,000! [Oh we could add the $.10/share dividend to make this a total profit of $2189.]
2) you can buy about 505 HUN shares on margin -- making your profit = $7,272 minus margin interest of $50~$100 = about $7,200 or over 3X profit from non-margined stock investment strategy. [$7,700 profit with dividend]
3) you can buy 9 contracts of August $7.50 calls which will each be worth about $1,350 (13.50*100 shares/contract) after a $4 B settlement. This means you would have $11,150 profit.
4) you can buy 20 November $12.50 calls, which will each be worth $850 after a $4 B settlement. This means a $16,000 profit (not bad for a $1,000 investment!!!). This also gives you added time which would allow for the taking advantage of the chemical sector recovery and/or a potential acquisition of the cash rich HUN.
Let me see . . . which is better? $2200 OR $7700 OR $11,150 OR $16,000 (with the potential for a lot more profit)? You decide!
PS I have a LOT of HUN calls all out of the money and with various expiration dates. My favorites (by holdings) are the August $10s and the November $10s, but this is strongly influenced by the fact that the July calls were not offered until this week.
You're making a lot of assumptions, I mean granted if things work out, of course the highest risk/reward option will give you the best return.
But then again, if you're so sure, why don't you borrow and dump in your life savings. Many of us do not have balls for that.
I've looked at the percieved odds and payout before deciding how much to risk. I think the best way to play this is a mixture of options and stock, some Jun/Jul/Aug + stocks so that you avoid the all or nothing scenario.
Good luck getting it under 6.50 on Monday
since the markets are closed for Memorial
Day. The market will be slow tomorrow as
Big Money will be on their 4 day weekend.
Put an order in under 6.50 and see what
happens Friday. Good Luck