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Originally Posted by Peter76
Not to be nosey  , but about how many option contracts are you talking about? My broker charges $29 min per option trade (up to 10 contracts)...you can't get too much cheaper than that, so by the time you subtract commissions, you'll be needing at least 5 contracts for it to be worthwile... |
Whew, get another broker!*
OptionsXpress is 1.50 per contract, with a $14.95 minimum. Interactive Brokers is $1.00 per contract with NOOOOO minimum. That is one thing that makes this strategy viable. IB does have a $10 per month minimum commission. You will save big time there on your trades.
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Why...margin is what makes it....EXCITING!!!  
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It is exciting, but margin calls are not! I have no real problem with it, if you know what you are doing, but I've seen some people get hurt pretty bad. I just don't need it with how I trade.
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Ummmm....those 7.6% 3 month bonds: are they anything like the securities offered by American Business Financial Services that declared bankruptcy a short while back? (you know, the firm that advertises those 10% 1-year notes in your local Sunday paper, and once you get on their mailing list, they send you 2 mailings PER WEEK). I don't know if I would be putting my 'reserve funds' for option calls in unsecred, junk, Z-class subordinated debentures....
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I hesitated to even mention this, because people are soooo skeptical and that's fine. I've seen those ads in the paper, I'll stay away from them! Interactive Brokers makes these bonds available to their customers who are 'accredited investors' To qualify, you have to have a NW of 1mil and annual income of 200K. (I'm not answering any questions about that**
) They are actually 15 month bonds, I assume for their financials, but they announce their intent and DO redeem them every 3 months. You can either cash them out or roll them over. They have done this for over 3 years now and redeemed them in 3 months every time, but I guess there is no guarantees. The coupon rate is 8%, but the commission of 1.00 per 1000, brings the yield down to 7.6%. A financial publication did an article and mentioned the bonds not too long ago (maybe Barron's), and now the 3 months are pretty maxed out, so they have issued some 18 month bonds, with a 6 month call at 8.0%.
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Sounds like an excellent strategy Beachbum. My only concern is that I've already loaded up a bunch of money into DRIPs (utilities, financials, REITS), and being the extremely conserative person I am (politcally, morally, fiscally, behaviorally), I tend to prefer most of my assets in higher yielding bonds/preferred stock, rather than REITS or equities yielding 2-4% less (I know, earnings and divvies grow over time...just give me a little time to come around and see the light).
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The dividend stocks I've looked at all yield at least 3%, most 4% or higher. PGN is currently yielding 5.35%, with the stock at 44 and you can write a Jan '07 50 for .90, which would add another 1.2%+ per year paid in ADVANCE. This would give you a 6.5% withdrawal rate, assuming the dividends keep up with inflation! If the stock goes above 50 by expiration, then you've got a LTCG of over $6.00 per share, or another 8.5% annualized, that's about 15% per year with the dividends and option premium!
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So, my only problem would be having enough moolah allocated to keep buying common stocks if I time it completely wrong and keep getting my puts exercised.
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That would be a problem*
, you would have to decide to change your allocation I guess, if you wanted to follow this strategy.
Beacbbumz* 8)