Steve:
I hate to get back to options, since I'm really more concerned about the reasons for AOL's moves, not option discussions. I believe those are more appropriate for the other thread. But I couldn't let your posts go without addressing some of your misinformed points. First the attacks.
<<I think what you're doing is confusing delta--the rate of change of the option's price for a given change in the underlying issue--with the number of shares the option represents.>>
I hate to break it to you Steve, but I'm really not confusing anything. I know exactly what delta and gamma are. I used to trade options for a living. Shucks, I'll even throw in a theta and raise you a beta.
<<Buy a put, write a call and the position is identical to a short position less the option's bid/ask spread.>>
This you're right on in theory, but you ignore the dynamics of the individual investor. First of all, although an option bid/offer spread may be wide, it's probably narrower than the 2 bid offer spreads you'd have to cross to do it your way. Also, throw in the fact that there are four commissions (2 in, 2 out) vs. just 2 on the option (in/out). Finally, margin requirements are often stricter on shorts than short calls, not to mention the fact that shares are sometimes difficult to borrow.
Finally, one last quote from myself.
<<At lower prices, it's as if he shorted fewer shares. How many fewer? >>
Notice the words AS IF??? If you're going to quote me, please try to do it accurately. But since I was probably unclear as to what I meant, I'll try to do it again.
Let's look at puts instead of calls, since its easier for most people to think of buys rather than sells. At expiration of a put option, if the shares are lower than the put price, the put seller must buy all hundred shares (assuming one put contract). If the price is higher at expiration, the put seller keeps the premium.
However, I prefer to look at the premium received as a synthetic buy. How many shares did he synthetically buy? Depends on the price. Since the premium is a fixed amount, the higher the stock price, the fewer synthetic shares. It's as if the buy ticket doesn't include the number of shares until expiration.
Hopefully now we can get back to discussing AOL's seemingly random stock price. How do I get to start that doesn't need to make money, whose stock price is never affected by bad news or competition, and only seems to go up? If someone could tell me that, I'd gladly pay them handsomely.
Regards,
Jason Cogan |
