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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: Bilow who wrote (77911)	10/30/1999 8:02:00 PM
From: RDM	Respond to of 1586543

I wish to comment on your analysis <(1) If the stock ends up at exactly $20, the options both expire worthless, and you keep the 3/16ths. This is equivalent to the profit you would have if you had bought the stock at 19 13/16, and then sold it for 20.> I agree, more or less. If you buy the stock at 19 3/4 and sell the stock on the expiration day you pay two commissions, one to buy and one to sell. I deal with Charles Schwab and this would add .143 cents to the cost for a total cost per share of $19.893 . Thus I would profit by 10.7 cents had I a long position. With the option I profit by 3.3 cents for 3/16 minus the commissions and 8.2 cents which is the time value of the money that I did not tie up for a month (assumig interest at 5% per year). Thus the total return is 11.2 cents and this is more than the long position. (I prefer a 15% annual return on my cash which would increase the advantage of the option). Thus for the price of 20 the result of the option is no worse than direct ownership. <(2) If the stock ends up below $20, then the put will cost you the difference. Say it ends up X dollars below $20. You will owe X on the put, but have the 3/16ths. Consequently, your total return will be 3/16 - X, exactly the same as if you had bought the stock at a price of 19 13/16, and sold it at 20 - X.> If the the stock ends up below $20, then I buy the stock for $20 cash and hold the stock. I will take a loss applied to my capital gains from the cost of the put and receive approximately 40 cents back on my taxes from the cost of the Put loss. The put premium will show up as a reduction of my cost basis on my stock when and if I should sell it. Thus my cost basis for the acquired stock will be 18.9825 including the purchase commission for the stock. From a cash basis I receive a discount of 40 cents from the $20 acquistion due to the tax benefit. My cash cost is $19.60 which is less than the $19.89 had I went long. <(3) If the stock ends up above $20, then the put expires worthless, and the call makes you money. Say it ends up X dollars above $20. You will make X from the call, plus you have your 3/16. The total return will be X + 3/16, exactly the same as if you had bought AMD at a price of 19 13/16, and sold it for 20 + X. In other words, your profit is going to be the (signed) difference between the price of AMD on expiration and 19 13/16. That's why it's called a "synthetic long."> There are only issues of commissions that I would point out. The option position is at about 3-4 share dis-advantage due to the higher commissions. The long position requires the use of one cash for approximately one month to acquire the stock. This interest amounts to $.08-$.24 per share depending upon your time value of money. Otherwise it is identical except the long as an added advantage of not selling on the options expiration day. I would say in overview that: 1. There is a minor increase downside protection provided by the options which is provided by the tax advantage of he call expense ($.29 per share). 2. There is a big difference in the amount of current cash required. Resulting in a $.05 to $.21 lower cost with the options on the upside case of the stock selling for more than $20 at the expiration date While I think that there are the minor advantage of doing it. I would never propose to do it on a major scale. The amount of my activity here is small by comparison to my AMD holdings. It is complicated and only of minor advantage with the serious consequences of limiting the gain possibilities to only short term rather than long term gain. I went through the above analysis to show you and convince myself that the action is not clearly disadvantageous or crazy. The reason I did it is I am bored waiting for AMD to show "it's full potential". (Paul stifle yourself here) And it is fun to have a change for a return on a small investiment with "nothing down" and the $.05-.21 cents per share advantage for the upside scenario should be enough to pay for Elmer's beer.