MSFT-How to make money for new investors through option. Message Board

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Technology Stocks : MSFT-How to make money for new investors through option.

MSFT 517.81

-1.5%

Oct 31 9:30 AM EDT

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To: IQBAL LATIF who wrote (32)	6/27/1997 1:02:00 PM
From: DaveO	of 57

I see your points, but in this spread the optimal return is realized when the options expire and the stock price is above the strike on the sold puts. So I agree with you calculations of potential net loss, but I disagree on you calculations of the potential net gain. My goal is to have MSFT close above 150 on Oct 17th, and let all options expire worthless; that would leave me with the $14 per share ( $1400/contract ). Certainly I could close the contracts early if the share price were above 150 and I wished to take my money, but I would have to sell the puts I hold and buy back the puts I sold and in that case things would turn out more like your net gain calculation. BTW, I noticed an even better opportunity last night: sell MSFT OCT 130 for 10 ( it has come down today :( ). buy MSFT OCT 125 for 6.5. This results in $350 per contract, with a potential loss of $150. The reward/risk ration is better than my other scenario, and the difference between the strike price has dropped from 20 to 5! which is much safer. As someone pointed out to me, the negative detail here is that I will have to hold the contracts until Oct to guarantee the maximum gain, and thier point was that I should look for near term opportunities instead so I could do 4 of these in 4 months rather than 1 every 4 months and ultimately have a better return, not to mention that since spreads don't always pan out its better to win 3 out of 4 in a 4 month period than to maybe win 0 out of 1 in that same period. My only problem with the examples that that person gave was the fact that they were only netting $100/contract ( admittedly after commissions, which I have not taken into account here ) on a 5 point strike difference which left them with more exposure ~$350/contract to ultimately earn just $100 !!! Granted the wait for expery is less, but the risk seems greater to me. Good Luck.

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