At What Level is FFH considered a value?

[Uccmal]

Do you typically by Deep in the Money for some light leverage, or go for out of money expecting definite appreciation with options. I have a few other set of Leaps on some other investments.

 

Hi Myth, Not an expert.  I can only relate what I do and I have made my share of mistakes along the way.  Right now I hold Leaps on GE, KO, and HD, and MFC (Montreal).  The HD is a proxy for shares bought in April 2009 and coming due in January 2011.  My plan is to exercise about 2/3 of my position and hold the stock.

 

Generally I buy them slightly out of the money.  I dont use any formula because I am buying with the intention of holding them for the duration, even though I may sell, or rollover, if the price is right, along the way.  In every case they are serving as a proxy on the underlying (cheap leverage).  

 

One major concern is liquidity.  The MFC bought in Montreal with the best of intentions I cannot get rid of now.  They are still out of the money and the bid has dropped off a cliff.  I had some 2010s expire worthless.  

Given MFC is probably the most liquid stock in Canada I wont be buying any more MX based options.  I had the same thing happen with CLS (bad valuation on my part).

 

The other major concern is stocks that do nothing.  With KO the stock has done nothing since I bought the 2011s a year ago.  I may get part of my value out of it or it may finally run up.  It would probably be better to buy the stock in some cases such as this and collect the dividend.  

 

They work best when value investing itself works best.  I have made a killing off of WFC, AXP, HD, some of the GE, and of course FFH.  

 

Overall my success rate is probably 2/3 using Leaps unlike the oft quoted - "most options expire worthless."

Had I bought the underlying the rate of success would have been the same, but the returns would have been less.  After 12 or 13 years of investing I find more and more that the KISS principal applies.  I understand some companies and undervalued situations, but I cannot for the life of me understand Black Scholes, or DCF formulas.  Anything that requires me to invent figures to make it work cannot be good.  

 

Right now in this climate I am steering clear of options.  Things could go up or WAY down before January 2012.  I am picking and choosing from a select list of dividend payers on the dips.

 

 

 

[SharperDingaan]

 

We try to use common sense - & not a specific $X, or %BV, price.

 

1) What is our sense as to the likely market/coy specific trend for the next 6 months of P(x) for +ve vs -ve outcomes. When it becomes net positive, & begins to trend up again - its time to consider repurchasing.

2) We treat it as insurance (& expect a net cost) against adverse events. There is minimal 'opportunity cost' if your default is a repurchase within 2 weeks of the price passing your 'sold' point.

3) On 'average' you have a 1/3 chance of being right (goes up, down, stays the same). Literature evidences that a short position (loss avoidance here) is more profitable than a long one. You enter the transaction because you think the 'down' % is > 1/3.

 

To do it well you need to be able to correctly assess the probable impact of dominant macro trends over the next 6 months. Net direction & a 'sense' as to the potential strength, outweighing specific 'accuracy'. Notable is that if you're good at 'hedging', you typically suck at trading (different skill sets).

 

SD