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Technology Stocks : America On-Line (AOL) -- Ignore unavailable to you. Want to Upgrade?

To: Dr. Zax who wrote (29690)	8/20/1999 6:14:00 PM
From: Steve Robinett	Respond to of 41369

Dr. Z You comment, I imagine that a position writing both calls and puts on the max-pain point would be even more dangerous (and profitable with a hit). That is a short straddle. If you write both a put and a call at the same strike price, you are betting the stocks goes nowhere. If the stock goes up, the call becomes more valuable and you lose, if down, the put becomes more valuable. Not to get too sophisticated here but such a position is essentially short volatility, the same position that bankrupted Long Term Capital Management last year. Not for widows and orphans--or me. In addition, all you can realize if you write an optiion is the value of the option at the time you sell it. The safest way to do that is by writing a covered call against a long equity position. You also comment that Today's AOL price action was a pretty clear example of the general public collectively deciding that the closing price was going to be about 95. Right. It's called an auction market, bid, ask, sold! Look, all closing prices or intraday prices or after-hours instanet prices are the general public collectively deciding on that price. Every shade of opinion, rational and irrational, gets priced into stocks in this collective voting process that represents people's opinion of the stock's future, people rational and sometimes irrational expectations. The maxpain point today, if you figured it out yourself using the Chicago Board Options info, was 100, not 95. Don't be misled by Time Traveler's post. All he did was demonstrate that the cheapest options set of put an call taken together is at the money--which is always the case. In any case, if you're considering playing with options, remember that all you have to do to play with options is be right about which strike price you buy or sell and which expiration you buy or sell and when you buy or sell it and when you close the position. To do that it helps to understand especially the volatility pricing aspects of options as well as the more obvious pricing aspects like intrinsic value and interest rates. There are a few other things (delta, gamma, etc), but understanding how everything works is the best first step. Best, --Steve