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Technology Stocks : Intel Warrants? Buy, Sell or Hold?
INTC 41.34-0.4%3:59 PM EDT
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To: paul flint who wrote (3)5/22/1996 10:21:00 AM
From: Andrew Chow   of 36
 
Premium is a poor measure of option value as you define it (price of
underlying minus strike price). Clearly as the time to expiry declines,
your definition of option premium MUST decline. Hence a historical
time series of the INTC - INTCW spread would show a widening over
time even if INTC was completely stationary in price.

In modern money management, simplistic measures such as
option "pemium" and option price spreads have been replaced with
more accurate measures such as implied volatility, and an array of
mathematical measures that are essentially the first derivatives of the
option price function with respect to different variables. These measures
have been given "Greek" names (delta, gamma, etc.) but are all based
on the ONLY correct way to value options, namely a mathematical
pricing system that follows what is called "put-call parity". The simplest
form of this is known as the Black-Scholes pricing formula.

If you are not familiar with these terms then I do not recommend that
you trade options, because you will be trading them against people
that are familiar with them, and have built the computer systems to
price options on a real time basis....although if I were more cynical I
would recommend that you continue to trade options - frequently.

P.S. With regard to taxes, if you read my prior post, you'll notice that
I stated the tax advantage is bigger with margined securities because
the deductible is taken in the current year at the ordinary income tax
rate, whereas with the option your premium is deductible at the time
of sale at the capital gains tax rate. The deduction with the option is
at best equal to the deduction with margined securities, and only if you
sell your option/warrant within the current year.
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