Compaq Message Board - Msg: 3483643

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Technology Stocks : Compaq

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To: ed who wrote (17734)	2/20/1998 9:12:00 AM
From: Andreas	Read Replies (4) of 97611

To Ed; Good example! Now, let's follow up with the second month. Let's say the price of cpq goes to $38.00 just before the option expiration date. Our millionaire friend with the $350,000 investment collected $20,000 (less commissions) as a result of writing (selling) the option to buy (call) at $35.00. What does he do now? The stock has risen to $38.00. The option previsously written is worth $3 + . If he does nothing at all he will be called away. Should he buy back the option he sold for $2.00 and sell the following month option at $35.00 or should he sell the following month call at $40.00. If he sells the $40.00 call he will realize substantially less premium than on the $35.00 call. In fact in the second month he may make very little if any money since the $40.00 call may approximate the $35.00 call he has to buy back. What does he do?? Your thoughts are appreciated.

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