What do you do, if after having written calls on C, the stock gets taken from you and doesn't go back down to support levels where you have traditionally repurchased the stock again, but begins to break out. This scenario will eventually happen, I believe. Are you willing to forego the dividend and not buy back before the ex-div date? Or will you buy back even at a higher price to get the dividend?
Do you not buy back, if the PE is above a certain level, even if the stock looks like it will go to new highs. I believe this will eventually happen - that C will see new highs adn will seek out a new PE level, when the market decides that the world's leading financial should no longer trade at 10 or 11 PE but at 15 or 17. Do you give up on C if it goes beyond your "fair-price" value. I know that I have used the same strategy you use on other stocks and once my shares are called, and the stock breaks out, I never go back, unless it comes down to my levels. Unfortunately, I have missed some good gains becasue of this in the past. I am doing well with my strategy, but this year, even though I am slightly ahead, it has not been easy compared to last year, nor has it been as profitable. Maybe it is just too early in the year to see where the chips will fall.
No bashers please. I just want to have an intelligent conversation with Typea or anyone else who has any insight.
Hey, I'm curious... What companies are you talking about concerning the Reverse Convertible Bonds. Yes, I think you are probably walking on the wild side... But the wild side might be right for you, until it gets too wild and doesn't go in your favor...
Anyway, I am curious which RCBs you are interested in amd what the terms are....
Thanks for the reply. I'm glad someone else is familiar with these. The company isn't the one issueing the bond, it is another company that thinks the stock will go up, but also wants to limit their downside.
My bottom line on purchasing them isn't the interest rate. It is whether I am comfortable owning the stock at this price. If I look at the stock and think it is a fair price for the stock (many of the backing stocks have already been beat up), I'm willing to pull the trigger on them. Currently, I'm only investing about 5 percent of my portfolio in them and I don't anticipate going higher than that.
Thanks again for the input. I'm usually a pretty conservative investor. Now I feel like I'm walking on the wild side!
Reverse Convertible Bonds.... Yikes!!!!! Talk about risk. Yes they pay very high interest, but unlike convertibles (which are risky enough) the holder (you, my friend), doesn't have any control over when the issuer of the bond will force you into conerting those bonds to equity. The issuer of reverse convertibles has all the power. Yes the interest rates are high, but if the stock goes down, you will be forced to buy the shares and be stuck with a poor performing stock. There's a reason why the interest rates are high, the terms are short, and that you have no control over when you can convert the damn instrument.
Why would you want to do that????? It's like writing a put on a crummy company you never want to own, because mostly companies in trouble issue such intruments.
I would be very careful playing with reverse convertibles. Way too risky....
You and a number of others on the board seem to be pretty well versed in the market. I'm wondering if you or any others have ever invested in reverse convertible bonds. I've been buying up short term (3-6 month) pieces recently with 20-25% downside cushions. Some of these pay a pretty hefty dividend (15-25 percent). I'm not going whole hog into them, but I've moved about 5 percent of my investments into them.
For those not familiar with rev conv bonds. They are put out by a company like ABN-AMRO or Barclays and are based on a single backing stock. There is a strike price of the stock based on a predetermined date. Let's say the stock price is $20 on that date. If the bond is a 3 month piece, paying 20 percent (annual rate), you get your dividend no matter what happens to the stock. Your principle is paid back in cash UNLESS the stock drops below the cushion during the three months and doesn't come back to the strike price. So, for a $20 stock, it would have to drop below $15 if the cushion is 25 percent. In that case, you get paid back your principle in shares of the stock based on the $20 stock price. Essentially, they are selling you a put option and paying you a premium for it.
I'm interested to see if anyone else is using these.
I trade with Schwab. Schwab allows you to look at canned screens. I have created 4 of my own that I run every day. As an example for a screen that I call value, here is what I use : choose stocks with S&P div and eps rating >=B, Div >2%, curent price <10% of 52 week low, 5 year eps fut growth >5%. With Schwab, you can also choose from all listed stocks or narrow it to companies of a certain size or listing
I also use similar screens without dividend qualifiers, but with PEG and PE qualifiers
They are meant to give me some candidates, and then i start digging. I limit myself to 10 companies to watch. By the time I scan my daily reading and run my models, it takes about 2 hours everyday
I also use a model to calculate the discounted cash flow value of a stock (Smart Money has one yopu can use for free) They provide a model that allows you to change critical variables like eps growth, hurdle rates, etc
I am retired so i have time to watch CNBC. I like to listen to Rick Santelli in the bond pits. Every morning, I read NY Times, Chicago Tribune, The London Times and El Comercio (Peru).. all free on line. I just scan them for articles that interest me. I also read Barrons and The Wall Street Transcript (at the library). The WST is very pricey but provides in depth financial analysis by financial analysts
I used to invest about 10% of my portfolio in naked options. Now, except for very rare occassions, I am just an option writer...mostly calls but also like writing naked puts when the underlying stock is at give away prices
Everything in the market goes in cycles. What is in favor today will be out of favor tomorrow. That is why I am not a great advocate of buy and hold unless you have a company that is capable of delivering growth in all types of economic circumstances, like SYK
I learned a long time ago that you can't make money on evey trade. You can never buy exactly at the bottom and sell at the top. For these reasons, I am a "singles" type trader. I always miss the top 10-20% of a stock's run up, but I consistently make money because I won't buy until a stock is cheap. It is pratically impossible for big funds to do the same thing because of their size
Great conversation.... thanks everyone.. This is what a chat board should look like....
yes, reading the newspapers and 10Ks, listening to conference calls, etc is very important. I watch CNBC in the morning to check futures, but don't rely on it. In fact, I find much of what they do on their television station to be assinine.. Any real discussion of issues on CNBC appears to be short lived and gets cut off for jokes, self-promotion, nonsensical stock market games and even gossip... I can get all their so-called"breaking news" on line via Reuters or the WSJ, etc. and I don't have to watch commercials.
Doing your own research is also very key and relying on Typea (or any other message-board member), although his picks have been remarkably on the money, is rather risky. I have several systems -- one is for short-term trading and the other is a longer term scenario. I am cutting down on my option buyng, because despite contrary belief, I find it harder to make money on options in a volatile market, than in a tame market, unless I happen to be watching the market tick by tick. That's much harder work than doing research. Again, I only use about five percent of my portfolio, at max, to buy puts and calls anyway.
Yes, once you have lost a lot of money in the market, hopefully one becomes a wiser and more conservative trader. Anyway, i have a breakfast meeting this morning, so I better hit the road. Have a great day...