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Strategies & Market Trends : Three Amigos Stock Thread
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To: Sal D who wrote (8025)8/23/1998 7:00:00 PM
From: Sergio H  Read Replies (3) of 29382
 
Joe, the example as you stated is excellent and it gives us an opportunity to look at several things.

First, let's look at the positions based on the prices at the initial entry point and the positions based on the prices as of Friday's closing.

INITIAL PRICES:
stock at $19/share
Feb. 17.5 calls at $ 4 ea.

CLOSING PRICES AS OF FRIDAY:
stock at $ 15 3/8 = 19 % loss
option at 1 7/8 = 53% loss

The option, as you noted has suffered the greater percentage loss and, also as you noted has the greater potential for gain, should the stock reverse course. The option is therefore the riskier of the two
positions.

In the same example, had you bought the options only , there would be only three options; either continue to hold, sell part of the position or hold. Continuing to hold adds further risk as the time value on the option slowly erodes.

Had you bought the stock only, there would be additional strategies available. You could sell covered calls to make up your losses or about 2/3 of the current paper loss. You could buy puts to provide a hedge for your position or you could concider doing a straddle.

I'll stop there for now. Let's continue the discussion using the SOSS example. It's a great example, as there is time on the option and a premium, also you have established the expected price of the stock and the market has provided some volatility.

Sergio
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