SI
SI
discoversearch

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Technology Stocks : America On-Line: will it survive ...?
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
To: Nasty P who wrote (3814)7/3/1997 1:33:00 AM
From: CLAUDE JOHNSON   of 13594
 
NP,
First ... I assume you don't own the stock and were looking to make a simple 5 point spread on a stock you predicted was heading south.

If you do the spread in calls and it heads south, you make your original credit and the options expires worthless. If it heads North, to the extent that a dividend comes up, or the time premium erodes, you have the risk of excercise. YOU DON'T WANT TO BE EXERCISED UNLESS YOU ARE COMMISSION FREE!!! You'll have commissions to acquire the stock and commissions to assign the stock. STOCK COMMISSIONS > OPTION COMMISSIONS by a great deal in most cases!!
Maximum Profit = net credit received
Maximum risk = diff in strikes - credit rec'd

If you do the spread in puts and it heads south, you make your spread - your original debit and must incur a commission to get out of each contract (you get out of the contracts when the spread is > the strike diff, or the time value is gone). If it heads North you let the contracts expire worthless. In this situation you get your gain later, but you remove your exercise risk. Additionally, in most cases when the stock drops below the second strike, in almost all cases the real spread will be grater than the strike differences creating a larger gain.
Maximum Profit = diff in strikes + time value diff - original debit.
Maximum risk = original net debit.

The 'book' is quite clear ... do Bull Spreads with Calls, do Bear Spreads with Puts. I know the net credit in the calls looks attractive, but the other considerations are equally as important.
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  

HomeMailHotSubjectMarksPeopleMarksKeepersSettings
Terms Of UseContact UsCopyright/IP PolicyPrivacy PolicyAbout UsFAQAdvertise on SI
© 2025 Knight Sac Media.  Data provided by Twelve Data, Alpha Vantage, and CityFALCON News