Replies to post #242295 on InterDigital Inc (IDCC)

[nicmar]

Ghors.. Or even if the shares went down, as long as the price didn't fall below the amount the calls were sold for, you would at least break even. I would think I wouldn't want to sell calls now in an unstable market, but most of the time the market is fairly stable so it seems to me the risk shouldn't be too high unless as you say, one got enroned. mo. .. nic

[Ghors]

Nicmar: Correct. You have made money as long as the stock does not drop. If it does drop, you can sell the option again and again. Your gamble is the stock dropping dramatically. But then, that is the gamble of the market. C.D.'s are safer, but the returns are dismal. Also, not all companies options sell for as much as other companies. It all depends on the speculation in the stock. Look at RMBS. The option money (juice or time value) is incredible.

Ex #1. You buy 5,000 shares of stock at $20.00 per share or $100,000.00 total. You then look at CBOE options and you find that the March 20 calls on that stock are $2.50. You decide to sell these calls through your brokerage account. They then sell 50 contracts (100 share per contract). You then receive $12,500 into your account. If on expiration date in March the stock is still at $20.00, your stock is sold and you keep the $12,500 and you have your $100,000.00 back. Your return is 50 % annualized ($12,500 divided by $100,000 = $12.5% divided by 3 x 12 = 50% annually). On this same $100,000.00 in a C.D. at 4%, you earn $1,000.00 per quarter.

Ex.#2. You buy the same amount of stock, but you sell March 22 1/2 calls for $1.50. The stock goes to $30. You get $22.50 per share, plus the $1.50 already paid or $24.00 total. You now have $120,000.00 in your account. You lose the opportunity to have held the stock to $30, but you got $24.00 per share. Your annual return for three months is 80%.

Ex.#3. Same as #1., but the stock declines to $17.50 per share. You break even, but you own the stock.

Ex.#4. Same as #1., but the stock declines to $15.00 per share. You are down on the trade, but you own the stock and can wait for it to go back up and you can sell a June 20 call and peck away at your loss while you wait for it to go back up.

Ex.#5. Same as #1., but the stock goes way down and never recovers. You have lost money, but you own stock.

Once again, I don't advocate options, but it if you can stand the risk, it is a lot better than C.D.'s.

One last thought for all. Look at the options on the ETF's. They are unbelievable.

IMO g hors