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Pastimes : Clown-Free Zone... sorry, no clowns allowed

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To: Tommaso who wrote (164081)	5/6/2002 3:17:30 PM
From: Tommaso	Read Replies (1) of 436258

OK, here's something I post every so often that does not seem to interest many people. At this moment, if you think the Dow is overvalued, you can buy the ZDXXJ, LEAPS of 2004, strike 14000, for about 3700. That is over 10% under the current value (this minute) of about $4100. Every time I point this out, someone pipes up and says, "but that's the time premium." If there were a 10% time PREMIUM, the puts should be selling at over $4500. No, folks, you are getting a DISCOUNT. Why? Because these are European-style options and that means they cannot be exercised until expiration.. So if the Dow should still be at this level in January of 2004, you would have about an 11% return. Apparently whoever is writing these options is dead certain that by January of 2004 the Dow will be a lot higher than it is right now and willing to take 10% less than the current fair market value because of that certainty. This seems to me as clear an anomaly as when CEF, which is nothing but gold and silver bullion, was selling at a discount.

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