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Politics : Formerly About Applied Materials

AMAT 258.88

-0.4%

2:13 PM EST

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To: Sampat Saraf who wrote (57441)	12/13/2001 8:39:03 PM
From: Alastair McIntosh	Read Replies (2) of 70976

Regarding Options; Sampat, you posted that if AMAT goes to $60 in spring 2002 he will not be able to take profits because the calls will be equally expensive to close It is not correct that the calls will be equally expensive to close. You are ignoring the decay of time premium. Suppose that AMAT goes to $60 by April 20. If the implied volatility remains the same as it is now, the calls can be re-purchased for $12.80. The profit at April 20 is therefore $60 - 42.21 = $17.79 gain on the stock less $12.80 - $4.60 = $8.20 loss on the option for a net gain of $9.59 compared to the maximum possible gain on the position of $12.39. However, the gain of $9.59 occurs over a period of 128 days for a gain of $0.0749/day. The maximum gain of $12.39 occurs over 219 days for a gain of $0.0566/day. The additional gain of $2.80 that can be realized is over 91 days for a gain of only $0.0308/day. The holder of the position must decide whether or not the risk of holding the position to expiry is acceptable given that most of the gains will be "in hand" at that point in time. I often do covered call plays and find that when the underlying stock spikes up before expiry it makes sense to close the position as the rate of additional return on holding to expiry is low and not without risk. Also, volatilities are high now. If volatility declines the gains on April 20 will be even higher. Al (non zero probability of arithmetic error in my example)

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