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No. of Recommendations: 2
Charlie,

So in October you will have received $.54 (.18 + .09*4 + $.75 - $.51) if exercised.

So if ERF rises over $13, you cap your earnings at $.78 (5.77%) over the 5 months which is 13.8% annualized. That seems like a decent return.

If it is exercised earlier, you make less but annualized will still be decent (i.e. after 2 months you would have received $1.02 - $.51 = $.51 which is 3.77% (annualized 15.71%).

However, if it is not exercised you are left with an asset that you will have paid $13.51 - $.75 = $12.76 per share and which is selling for less than $13.

So there's a narrow window of price range ($12.76 - $12.99) where you still have some paper profit in October.

If it is below 12.25 in October (12.76 - .51), you would have been better off to sell the stock now and accept the .51 loss immediately.

All of the above does not account for the fees involved in selling the stock or the option (nor taxes on profits, nor inflation allowance for the 4 months), but I understand it is an exercise/test of method rather than strictly a search for profit.

Does the above describe some of your calculations in your exercise?

Personally, I'm not sure the market is actually stable enough to work in this narrow a range. Pricing volatility in stocks seems much higher than in the bonds world.

It seems like one should have a good understanding of the underlying influences on the pricing before attempting the options route. I have done no due diligence here, but a company that halves its dividend will have some weakness that requires that action. So it seems to me that a lower price is likely to last, leaving you with an asset worth less on the market than you paid for it.

Regards,
Les
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