To: Art Bechhoefer who wrote (7038 ) 9/23/1999 8:00:00 PM From: Wyätt Gwyön Read Replies (2) | Respond to
Art, re: SNDK calls, couldn't believe my eyes when I saw SNDK down 17 today. Thought I'd never get another chance at this puppy (last bought some calls in the 70s and sold in the 80s). Looking at the SNDK option chain, it is amazing how expensive the short-term options are. For example, the at the money 65 strike price for Oct closed at 7 1/2--or 11.5% of the cost of underlying for the privilege of buying the stock at the current price within the next 3 weeks. Even if you had no faith in SNDK, you could buy common and sell calls at 7, collecting 11% for 3 weeks' worth of holding, while lowering your downside breakeven point to 58. (Now, you might very well get called out as early as tomorrow, but you've still got 11% for three weeks of holding.) To put that in perspective, back when I was playing SNDK more (back with SNDK around 40), I was able to pick up Jan00 40 calls for less than 8 bucks, or 20% of underlying for about a half year's worth of holding time. To me, the current high implied volatility and high premium price indicates that option holders see this as a very short-term and are bidding calls up in anticipation of a quick rebound. If I were to make a call play here, though, I'd go into the money to reduce time premium and risk. For example, you can pick up the Oct 50's for just 16 1/2, which is only 1 1/2 dollars of time premium. The breakeven is therefore 66 1/2, above which is net profit. In contrast, the Oct 70 costing 5 3/8 has a breakeven of 75 3/8. If, say, the stock went to 75 by Oct. 15 (option expiry), you would actually lose 3/8's of a point on the Oct 70, whereas you would net 8 1/2 on the Oct 50--giving you a 50% profit on your 16 1/2 investment with MUCH less risk. In order to do better buying the Oct 70 (for the same amount of money), you would really need the stock to get to about 80, and that's without adjusting for risk. Bring risk adjustment into the picture and I'd go with the in the money's unless I was pretty sure the stock would rebound to 90. On the other hand, if you think 82's conceivable, you're only asking that the stock go back to where it was at market close yesterday within the next three weeks. If you're right, you double your money. In any case, if that alleged press release from the company turns out to be a reality, all this may be a moot discussion and you may be sitting happy on in the money calls tomorrow. I actually hope it stays depressed for another day or two so that I can figure out a way to get my greedy paws on it! I think this is a great opportunity.
