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Technology Stocks : Oracle Corporation (ORCL)
ORCL 157.09-1.7%Feb 11 3:59 PM EST
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To: Michael Olin who wrote (6485)3/19/1998 8:41:00 AM
From: Almasy  Read Replies (1) of 19080
 
I think because each $10 security represents 1 Oracle share. Therefore, if the stock goes up $30, or 100%, they only have to pay out $10 for EACH share held.

Essentially this is the same strategy as writing covered calls - Oracle is getting a premium ($10) for holding the security. Although they have to give it back to you, they get the use of the money for 5 years, plus upside (although they are giving some of that to you).

However, you are right that you have to put up less money to get the same 100% upside (in this example).

As I see it you can look at it three ways:
1. You think Merrill's position on ORCL is wrong and therefore you are betting that they are wrong & the stock will be below today's prices in 5 years. However, it will need to go down more than the equivalent cost of money for you over that period for you to make a profit (my guess is that Merrill have a pretty safe bet here)

2. You think Merrill are right but you can't afford $30 a share. The stock will be much more valuable in 5 years time so you pile in & get more of these securities than you would be able to by buying straight stock.

3. You think ORCL will be approximately at the same price in 5 years time - in which case, why are you wasting your time on this thread instead of looking for more profitable investments?
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