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Bond alternatives?

 
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smokedog2
Outlaw
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Joined: 02 Dec 2004
Posts: 210
City: Cincinnati

PostPosted: May 17, 2006 5:19 am    Post subject: Bond alternatives? Reply with quote

I am getting to the age where I need to start getting a little money out of the market. I have real estate; it is at this point self sufficient – e.g. I’m building equity & paying down debt but no real cash flow that doesn’t get fed back eventually.

What I want is a hedge against a 2000 type hit.

My idea is to take a stock I like – HAL at about 75 I can get 15.60 for the 75 Jan 08 call on hal (whwao). That investment has $60 invested in HAL with a 14%/yr return (over 610 days) if the stock stays flat. If the stock falls 10% to $67.50 my return is 7%/yr.

Obviously if my stock picking is 20% wrong I have a problem and I unwind the position, but I have the $15 of pad to do that will as the stock I own is sold and the option I sold is bought back at a lower price as well. If the stock goes above $90 I’m missing out (see my calls on N), but I still get my return and the more it goes up, the safer my investment is.

I’m looking to cut my stock watching time, cut my risk, and ride the undue optimism of option buyers. Basically, I’m the bank, loaning money to those that want to buy stocks with options.

Any thoughts?

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smokedog2
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Joined: 02 Dec 2004
Posts: 210
City: Cincinnati

PostPosted: May 17, 2006 5:48 am    Post subject: Reply with quote

Or - how does margin work if I sell a HAL 75 put for $11. I use the margin to "cover" but do not actually take out any money.

Does this use of margin cost me interest?

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chavez
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Joined: 22 Sep 2003
Posts: 27375
City: Roseville

PostPosted: May 17, 2006 7:35 am    Post subject: Reply with quote

smokedog2, forget picking stocks. Pick managers who pick stocks. Find a good group of funds, and go with it. If you have the scrilla, get with a good adviser and use a 3pmm to do the work.

IMO, you should never trust one person to do your "stock picking", whether that one person be you, or some moron stockjock at XYZ brokerage. If your financial "professional" is recommending individual stocks, run far FAR away.

You are going to give yourself an ulcer otherwise.


And please, please do not use margin. To answer your question though, if you sell a HAL put - do you mean covered or naked? If you were naked and someone excercised then you would be out whatever the difference was between the strike and your cost to deliver. If you did this on margin then yes, you would be charged margin interest rates to do this. Check with your house if you want to get the current margin rates.

PS: The indicies are getting their asses kicked today.

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RIP MHL 04/25/1958 - 01/11/2006
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