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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1203  
Subject: Re: Option ROI question Date: 5/14/2013 6:37 PM
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Tavern1971,

You wrote, CRUS Jan14 $30 call. Purchased the call Feb 2013 for $2.91.
I purchased this when CRUS price was about $24. CRUS had came crashing down last fall. I felt that was a bit of an over-reaction to AAPL coming down, and would rebound. After all, CRUS is experiencing bigger revenue per phone in the Iphone5 vs. the Iphone4. I believe this will continue in next generations of phones from Apple. Downside risk is the huge dependence upon Apple (about 85-90% of revenues). Also, after I purchased the call, CRUS announced an inventory reserve of about $23M due to a customer upgrading to a different CRUS chip. I felt that before October, the price should rebound to about $35. This call is currently down about 50% at about $1.45.


What is your price target for CRUS? I can't do this part for you...

Your maximum potential downside is a $1.45. That's all time-value that will expire next January. What the odds that CRUS will approach (or exceed) $30/share by January? Loosing 100% of your investment is only mitigated by the possibility of a run-up on the stock between now and then. If you like the odds, hang on. If not, take your losses and walk away with what you can.

Also, INTC Jan14 $20 call. Purchased the call March 2013 for $2.34.
Purchased the call when INTC was trading about $21.50. I liked the potential of INTC expanding into tablets and smartphones. I feel there was limited downside due to the solid dividend, with nice potential upside. My price target for INTC before Jan 2014 is about $27. Call is currently up 100%.

INTC Jan15 $25 call. Purchased the call April 2013 for $1.08.
Purchased this call when INTC was trading about $21.15. Same reasons as above. I gave myself a little more time with this call. I think INTC will be $30+ before Jan 2015. Call is currently up 100%.


You appear to think the stock has more room to run. If your opinion hasn't changed, keep holding the options. Just remember that by holding you're eating through the time-value. That's about 84 cents in the '14 call and $2.16 (based on a 100% gain) in the '15 call.

Remember that this time-value will erode as you get closer to the call date, so it may be best to sell before you reach your target price if you can recover the difference through a recovered premium. So if you think about it this way, you're looking for something like a $7 price target to sell your '14 calls and a $5 price target for the '15s. You might want to discount your sell further to get you to a price target you have a high degree of confidence in ... but you'll have to decide how confident you are in your target price.

Finally, AIG Jan14 $45 call. Purchased the call March 2013 for $1.85.
Purchased the call when AIG was trading about $39.50. I liked the valuation of this stock at .6 price to book value. Also, I feel that AIG has cleaned up its portfolio and is starting to run smoothly. Only downtick was the claims from Hurricane Sandy (temporary setback during the 4th quarter). Price target for AIG stock is $52 before Jan 2014. This call is currently up about 85%.


Same logic applies here. If you're truly confident in your price target, you should be willing to sell these options around $7. If you're not that confident, lower your price target to something your more confident about.

Bear in mind that we're talking about some pretty hefty gains here. That's the think about options. They're leveraged positions. Gains tend to be relatively large. Losses tend to be similarly large relative to the initial position. For that reason, I'd be careful not to take on a single position that could wipe out most of your capital ... if for no other reason than it will tend to make you react irrationally when you stand to make a big gain or a big loss.

- Joel
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