Tuesday, May 4, 2010

Options are for Dummies

A few days ago I got a "hunch to buy a bunch" of call options on Russel Metals (TSX-RUS) because I wanted some leverage on a possible upside advance from the current $20.60 back to over-head resistance at the $25 level

I figured the October $21 calls at $1.60 could be a good bet and so 10 contracts would cost $1600. My son who is an advisor at Union Securities reminded me that this would be a "sucker bet" because I had to get too many things right. I had to know when the stock was about to move, I had to know which way it would move and I had know to the magnitude of the move. I if was wrong on any one issue I would lose my entire investment

Darren told me to consider the company's convertible debentures. They are priced at about $109 with a coupon of 7.75% and a current yield at about 5.93%. The call on the stock is all the way out to Sept 2016 with a strike set at $25.75. In other words the bond is like a long term leap option that pays interest and won't go to zero if I am wrong. Looks almost like win-win, I get paid to wait if nothing happens and I get the upside if the stock pops. Leave those call options for the dummies and seek out those convertible debentures

No comments: