DRYS Jan 2011

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droid17

Hi all :)

I am looking at a DRYS Jan 2011 play. Here are my background thoughts.

Right now I feel the value of DRYS is an unknown. If oil collapses the drill ships that are being built could have negative value, but the CEO has preferred shares so he has skin in the game.

If oil goes way up ($100) these new contracts could be worth a lot.

That being said I think this will all unfold within the next year and I feel oil prices are going to go back up. I am bullish.

I am thinking of selling the Jan 2011 5s puts and using them to finance the Jan 2011 7.50 calls so if I were to do it today it would roughly cost .25.

Is this a common play for this type of situation?

Thanks,

Droid
 
Quote from droid17:

Hi all :)

I am looking at a DRYS Jan 2011 play. Here are my background thoughts.

Right now I feel the value of DRYS is an unknown. If oil collapses the drill ships that are being built could have negative value, but the CEO has preferred shares so he has skin in the game.

If oil goes way up ($100) these new contracts could be worth a lot.

That being said I think this will all unfold within the next year and I feel oil prices are going to go back up. I am bullish.

I am thinking of selling the Jan 2011 5s puts and using them to finance the Jan 2011 7.50 calls so if I were to do it today it would roughly cost .25.

Is this a common play for this type of situation?

Thanks,

Droid
More...

Why not just buy the stock?
 
Three reasons

1. If the stock never goes up and it don't finish below 5, then it was basically a free roll of the rice.

2. I can get more leverage with options, in addition if if were to get in the money with much more time value left I could sell for more then if I just flat out owned the stock.

3. Options are more flexible then stock. Depending on how it moves I could readjust on the fly.

Just my thoughts

Droid
 
Quote from droid17:

Three reasons

1. If the stock never goes up and it don't finish below 5, then it was basically a free roll of the rice.

2. I can get more leverage with options, in addition if if were to get in the money with much more time value left I could sell for more then if I just flat out owned the stock.

3. Options are more flexible then stock. Depending on how it moves I could readjust on the fly.

Just my thoughts

Droid
More...

1. Sure. But by the same token, if it goes up to 7.50 you come out a loser with the option play, a winner if you buy the stock.

2. This is the one that has me worried for you. It's easy to forget that leverage works both ways.
 
Actually, this might be a classic case for combining the two:

Buy the stock at $6.08
sell a March 7 call at $0.81
and, sell a March 6 put at $1.10

(do the 'what if' for yourself), and Yes I know that a covered call is risk-wise equivalent to a sold put -- so the above can be achieved by selling one put at 7 and another one at 6). However, remember that aside from having a similar risk profile, there is one big difference: one you will do with an underlying that you own and would not mind to lose ; while the other one you will do with an underlying that you do not have, but wouldn’t mind to own. Doing these two simultaneously, say by March, gives you ample time to decide which of the two scenarios is more fitting for you.


Quote from dmo:

Why not just buy the stock?
More...
 
Hi DMO,

I see your side, and agree to an extent. I think the big seller for me though is the time value. With over a year till exp if it moves and still has a lot of time I could see for a bigger profit.

Bben1006 thanks for your thoughts. The thing I don't like about your strategy in this situation is that the stock has a potential to fly either way. If it goes up then the 7 sold call caps my gain. If it flys down, I am buying more.

Thanks guys,

Droid
 
Quote from droid17:

Right now I feel the value of DRYS is an unknown. If oil collapses the drill ships that are being built could have negative value, but the CEO has preferred shares so he has skin in the game.

[/B]
More...

I haven't looked at DRYS in a while but I don't think they're in the <b>drill</b> ship business --- they are a dry bulk shipping company. So based on what you said, are you perhaps confusing this with one of the oil tanker companies?

And yes, long calls will have unlimited upside, but if you're curious, why not sell a put, or even do a synthetic position where you're long calls/short puts? Just some food for thought.
 
Hi Rick,

Yes DRYS has recently put contracts in for oil tankers and the ceo has been getting hit for moving out of his realm. People either feel he is a genius or a nut

Drys / Cardiff web site...
"Our strategy of sector diversification (i.e. drybulk and tanker vessels) achieves consistent financial results for our clients, which cannot be achieved by single sector focused companies. Furthermore, history has shown that earnings in the three main industry sectors of drybulk and tanker vessels very rarely move in parallel and frequently move in opposite directions."
 
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