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Gold/Mining/Energy : Big Dog's Boom Boom Room

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To: chowder who wrote (84793)	5/18/2007 5:02:19 PM
From: ChanceIs	Read Replies (1) of 206325

>>>Can you lose all of the $6.40? Does that happen if the options expire worthless?<<< Yes and yes. Two key components of any options pricing formula (e.g. Black Scholes) are time until expiry and interest rates. More time until expiry, then higher premiums - he who sold the option has to keep cash tied up longer backing the option. Higher interest rates, then higher premiums - he who sold the option could have been getting more interest parked in cash/T-bills vice the premium from the shorted option. But isn't this just life??? You want to start and operate a business, you have to take more risk - many seem quite good at using OPM however. You better know what your costs will be and when the demand will arrive. Calpine borrowed $19 billion to build power plants - "build them and they will come." At best they sold 50% of the power available. They went belly up. They basically bought options on power. Those options never got into the money. Who paid for the options??? Why the shareholders and bondholder, naturally. Management paid itself well for as long as the doors were open for business - for being an option broker. Do you drive a car??? (Of course.) Do you have car insurance (Of course.) You may not realize it, but you bought an option there. You paid a set amount. It lasts for a set time. The upside is infinite - after the first bent fender you have met the deductible - and if its a ten car pileup you caused, your option will be very, very far into the money. (You will also be banned from the options exchange in the future - or have a very high premium set against you.) Do you pay social security??? (Of course.) If the working population keeps growing faster than the retiree population, then you might get something (this is a time to expiry issue - and currently the retirees grow faster than the workers so the option expiration date keeps getting moved forward). Is the government lying about the inflation rate (this is an interest issue - higher inflation requires higher interest which requires higher SS indexing). The likelihood that your social security option will be in the money when you retire is slim. If you look close enough, life is broken down into a series of little itsy-bitsy options. I will leave it to you to explain to the board why love is an option.

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