Roger's 1997 Short Picks Message Board

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Strategies & Market Trends : Roger's 1997 Short Picks

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To: Roger A. Babb who wrote (6933)	11/13/1997 1:42:00 AM
From: Bearded One	Read Replies (1) of 9285

It seems to me that, in essence, the investors paid about 35-40 million dollars (price of lowered interest rate for loan) for about 3.3 million options at a strike of 104. So about 11 dollars a share for a 5 year option $34 out of the money. That is, if AOL hits 115, then they had a good deal. The Reg S people get paid if AOL stock price grows at 10% a year, which isn't very much. More interesting is the implied volatility of this "virtual option." It's a 5 year option. I don't have any Black-Scholes calculators with me, but it seems to be a lot less than AOL's current volatility. Which means that the options were cheap. The other side is that one could argue that AOL's volatility must go down from it's ridiculous current levels. But a stock with a 52 week range of 24-91-- and they sell the right to buy shares at 104 anytime in the next 250 weeks? Benefits or drawbacks of the deal aside, I am willing to claim that this deal implies that AOL is overvalued according to the people involved in the deal.

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