Tuesday, January 04, 2005

Options and Charter

Well since the url to this website is www.wilgrowinvestments.com I feel it would be fair to say what's going on in my head today.

Today I am thinking about options.

I am debating on buying a call option on CHTR.

First let me explain what an option is. If you buy an option you are buying the right to buy (call) or sell (put) a stock at an agreed to price (the strike price).

For example, let's say I bought a call on GW stock with a strike price of 50, and let's say the current price is under 50. This means that if the stock goes above the strike price of 50, I can buy the stock for 50 dollars a share. So if the price goes to 60, I made 10 dollars per share.
You pay a premium to be able to buy the option. The more likely the stock is to hit the strike price, the larger the premium. People sell (aka write) options trying to make money off of the premium they receive for selling them. Each option represents 100 shares.

Please note there are many many many derivations of this, I am giving the most simple.
So etrade has an Jan 2007 2.5 call @ .75 right now. This means I pay $75 for every option contract (100 shares) I want to buy. CHTR would have to go to 3.25 for me to breakeven (for a naked call the break even is the strike price plus the premium).

2.5 to 3.25 is a hell of an increase in 2 years. 30% to be exact.

But charter's stock price seems to be driven off of news. Every time they announce they are refinancing their debt their stock price goes up. (up 15% since November when some commenter on my blog said they were going to hell). If Allen says they are going public their stock price will likely increase. If Cox, Comcast, Time Warner buys them, then CHTR will prob go up. If they get their act together, their stock will go up.

I would not be surprised if at some point between now and Jan 2007, that CHTR hit 5. If it hits 5, then I would make $2.50 for every $.75 I spent to buy the contract.

Why not buy them long (the normal way)? Because I do not have enough faith that any of the above is going to happen. However, I am considering an option because it is swinging for the fences. I would try to hit a homerun. (Options can be a safe move if you own the stock already, aka covered. But that is a topic for another day.)

As most of you know, swinging for the fences is not my style. So I will probably pass. But this is the thought going through my head today.


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