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Technology Stocks : Novell, NOVL, I really need some advice
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To: Malsi who wrote (30)7/2/1997 5:02:00 PM
From: Ayman Abukhater   of 46
 
Malsi,
Quick Option Primer:
The option value changes in direct relationship to the market value of the underlying stock. Option Price (called Premium) is computed by adding 1. the Intrinsic value and 2. Time value. Intrinsic value is the amount by which the stock price exceeds the striking price. The time value is the amount above the intrinsic value.
Let's apply this to what we have:
1 LNOAU contract is an option that gives the right to buy 100 shares of novell at the strike price of $7.50. It expires in the third Friday of January, 2000 ( two and half years from now). The price of the underlying stock (Novell) = $7.00 (For sake of simplicity).
Now, let's look at some values:
Intrinsic Value = Nothing. 0. (out of money).
Time Value = $3.
Option Premium = 0 + 3 = $3.

Now let's fast forward to a year from now. Novell is trading at $15. Here is how the picture would look like:
Intrinsic Value = 15 - 7.50 = $7.50 (in the money).
Time Value = Maybe 2-to-3 or maybe higher, depending on other factors discussed before
Option Premium = 7.50 + 2 = $9.50.

At this point you have the option:
1. To sell your leaps at profit of $6.50 a share.
2. Continue to hold for more potential of upside.
3. Exercise.

Regards,
Ayman
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