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Technology Stocks : Y2k : effects on non Y2k related stocks
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To: Kevin Michael who wrote (47)8/14/1998 10:23:00 AM
From: flatsville  Read Replies (1) of 54
 
Kevin--Buying/selling options is a form of gambling/insurance depending on your perspective. In the y2k scenario we've been discussing it would be a true roll of the dice.-----First, as you probably know a put is the right to sell the underlying item at the strike price (a given price) until the expiration date of the put. If you own stock one way to insure that you won't lose all or part of your investment is to buy a put. You may decide to protect only your basis in the stock (purchase price) or basis plus all or part of any recent gain. If I bought 100 shares of Bogus Banchshares at $20 and it is now at $50, I may decide to insure the entire $50 because I see trouble down the road with state regulators. So I buy one put (covers 100 shrs.) for $1. Shortly thereafter Bogus Bancshares plunges to $40 bucks a share after state regulators begin an investigation. I may chose to ride out the bad times hoping the stock goes back to $50 and beyond or not. No matter what happens, I have the right to sell my stock at $50 per share until the expiration date (the "insurance" feature.) Pity the poor put writer who must buy my Bogus Bancshares. Alternately, Bogus could soar to $60 (corrupt state regulators never bother to investigate) and I would of course see no need to exercise my put so the cost or premium I paid for the put would be a loss to me, albeit a small one.
You can also buy a put on an index like the Dow Jones Industrial Average because you expect the index to drop. Of course many of us expect it to drop BIG TIME, WAY DOWN due to y2k. How low can she go? Who knows? At this point LEAP (long term) puts have been written for Dec. 99 64 (expires December 1999, strike price 6400) and Dec. 00 64 (expires Dec. 2000, strike price 6400.) Right now cost on these puts ranges between $3-$4 (considered cheap? Options are hard to value.) The price of the puts go up and down. Some people may decide to buy the puts and trade them rather than exercising them. If the DJIA drops WAY DOWN, below 6400 before expiration you could make some real money if you are still holding those puts. If the DJIA is trading at 6400 or above you could lose the premium you paid for the put because there is no need to exercise. This my friend is the "gambling" aspect.
The best explanation of put and call options is in the investor education portion of the CBOE. I'll post a link later. I haven't by any means covered all the ins and outs of puts. Consult your broker. Hope this helps. P.S. to ALL--If anybody else wants to confuse Kevin, be my guest. My teaching skill are rusty.) "flatsville"
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