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Technology Stocks : Dell Technologies Inc.

DELL 122.55

+4.4%

Nov 21 9:30 AM EST

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To: edamo who wrote (111936)	3/25/1999 12:17:00 PM
From: Chuzzlewit	Read Replies (2) of 176387

Okay, my brain is back in gear. A few cups of coffee makes all of the difference in the world. The problem becomes so simple in the morning. The risk you have in selling a put is limited to the difference between the striking price and the premium. The risk you have in buying a stock is limited to the purchase price of the stock. In this case the risks are additive because you have placed all of the premium in the stock. Therefore your risk is equal to the striking price. Your cash position at expirey is a line with a discontinuity at $85/share. At expirey, your position will be worth $2.25 * the lesser of the value of DELL or $85 plus 1.25* the greater of 0 or the difference between the value of DELL. But have you really gained anything? You have placed $8,500 at risk and effectively tied up 225 shares upto the striking price, beyond which your position has the characteristics of a 125 share long position. The use of margin (buying power) is a red herring. The issue is cash at risk. So I argue that if DELL should close below the striking price your position is better than simply going long 220 shares. But at expiration prices above the striking price the pure long position is better by a wide margin. The advantage in your approach is the ability to dynamically increase your holdings, but if you think about it, it is really no different than using margin with interest. Another problem with this approach is that there is very little time value in the option (because it is so deep in the money). Maybe I'm still confused, but I see the long position as better. While it is slightly riskier on the leg up to $85, it provides much greater return when price exceed $85. TTFN, CTC

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