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Pastimes : Don't Ask Rambi -- Ignore unavailable to you. Want to Upgrade?

To: Rambi who wrote (36664)	8/30/1999 3:39:00 PM
From: Ilaine	Read Replies (1) \| Respond to of 71178

Why does the phrase "the blind leading the blind" come to mind?<g> I think what you said probably makes perfect sense, and it only goes to convince me further that it's scarey and I shouldn't do it.

To: Rambi who wrote (36664)	8/30/1999 10:15:00 PM
From: Don Pueblo	Respond to of 71178

You're closer than you think. Here is an easy way to understand it: ( I hope) Let's say that I want to sell an options contract, a call option for example. Call options go UP when the stock goes up. I own a stock that I think will go DOWN, so I will sell an option to buy my stock. I get money for the option, and if the stock goes down, the buyer would be stupid to exercise his option, it would save him money to just buy the stock outright. So I keep the money when the option expires worthless. You want to buy this option, you think my stock will go UP , so that you will be able to buy the STOCK from me at some future date for less than the price YOU THINK IT WILL BE LATER. I sell this call option to you. That is called an "open contract"; in other words, it "exists", we are both holding an open contract. That's one "open interest". Now, let's say you are right. The stock goes up, and I have to buy that option back from you or lose my stock.The time comes to buy it back and I buy it back and you sell it to me, now we are down to zero "open interest". But if we are still "open" on ours, and two other people take a position in the same option, (one sells to open a position and one buys to open a position, or one goes 'long' and one goes 'short' the CALL option) then it becomes TWO open contracts. 1000 PAIRS of people all having an open position in a particular option = 1000 contracts open = 1000 open interest. In real life, you may have an 'open position' while the other side of that option, the short side, may change hands. Similarly, you might be long a contract and sell it, but somebody else takes that long position without the person who is short exiting his position. So the "open interest" could stay the same although the contract is being traded. Does that make sense? Now, the other part is that the smartest people in the world are the people that trade on the CBOE, the Chicago Board Options Exchange. These guys have this stuff down to a fine art. Let's say you were considering a Sept 45 call option on a stock that is trading at 50 bucks. The option MUST be at least 5 bucks, (if it were not, you could buy the option for 45 and immediately sell the stock for 50 and make 5 bucks) but on top of that is the "premium" or "time value"; the "extra" you pay to own that option for a period of time. Theoretically, a December 45 call is more expensive than a September 45 call on the same stock, because you have more time to exercise it. But it doesn't stop there. Two different stocks can be trading at the exact same price (say 50 bucks) and the Sept 45 call can be 6 bucks for one stock and 9 bucks for the other one. That's because some really smart guys have this mathematical formula figured out that lets them take the extra money if you not EXACTLY right on which way you think the option will go. For example, you could pay 9 bucks for that option, and in two weeks, the stock could be THE EXACT SAME PRICE, and the option would now be selling for 7 bucks (even if you ARE in the money!). You lose 2 bucks even though the stock did not go up or down. And the person that has the other side of you option could be a very, very smart person with a large amount of money. Conceptually, the larger "open interest" the better, since if you own a contract, there are more buyers if you want to sell it, but the smart guys have all that figured out to. They are VERY smart. It's a very, very complicated game, and it's hard to win at it unless you can really predict tops, bottoms, and the moves in between. Like Randall Duke said to Mortimer Duke, "Tell Mr. Valentine the good part, Mortimer..."