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Strategies & Market Trends : Options -- Ignore unavailable to you. Want to Upgrade?

To: Poet who wrote (4625)	3/10/2000 10:15:00 PM
From: Jill	Read Replies (2) \| Respond to of 8096

I know you will be HAPPY to hear this but leaps come out on JDSU on Monday. To me however this means real dilution in the calls we currently hold--because of split, and leaps available the same day. Doesn't seem coincidental does it? I plan to exercise the 110 strike anyway, probably next week. I'll be interested to see what this does to my June 260 and Sept 250 calls. Also interesting to see the premiums they'll come up with.

To: Poet who wrote (4625)	3/11/2000 2:54:00 PM
From: the options strategist	Read Replies (2) \| Respond to of 8096

Warning/this is a long post on simple spreads. Because some of the spreads I do are somewhat complex, I'm going to start with a simple bull put/credit spread. There may be lurkers who would like to sell puts but either do not have the cash or margin to tie up selling naked puts or their broker will not allow it at this time or perhaps they may simply want a less risky trade. Say you're bullish RHAT currently $71. Support around 60 on the charts. (I am a diehard chartist so bear with me) <ggg> Below are different plays on RHAT for examples. A less aggressive play: Purchase an april 50 @ 2.75 Sell an april 60 @ 5.50 Receive a credit in your acct for 2.75 Using 10 contracts in this example: In a bull credit spread you will only get $2750 but you only tie up $7,250 margin (10 contracts x 10 points,i.e. ap 50 - ap 60)=10,000-2750=7,250) vs. the margin you would have to tie up on a naked put. Figure it out. Point being your margin is much lower. Translated, you don't need as much cash in the bank. You always want to know when you make the trade what your breakeven price will be. To calculate your breakeven price take the higher striking price (april 60) and subtract net credit - ($2.75). breakeven is $57.25. You start losing money anywhere below this. This is a relatively conservative (least aggressive) spread. A more aggressive would be to buy a 60 strike and sell a 70 strike and the extremely aggressive would be to buy a 70 and sell an 80. You get the picture? If not ask questions. If someone on the thread cannot answer, I will find someone who can :):) One other example on the same underlying. If you are fairly bullish on RHAT short term. buy april 65 @ $8.25 sell april 75 @ $13.25 credit $5.00 Credit spread is 5 points. If RHAT advances by april expiration anywhere above 75 both puts expire worthless and you keep the maximum profit (5.00). In the credit put spread, the max. profit potential is limited. But the risk is limited. If RHAT declines by expiration, the maximum loss is anywhere below 65. The risk is five points in this example. To understand this, understand that if RHAT were anywhere below 65 at expiration, the difference between the two strikes would widen to 10 points. So you would have to pay 10 points to buy the spread back or to close out the position. Since you took in 5 points, you could only lose 5 points. The breakeven point before commissions would be 70 at expiration. With RHAT at 70 in April, the ap. 65 would expire worthless and the 75 would have to be bought back for 5 points. If you want to play with the big boys and girls and sell puts to buy calls or to bring in extra cash, you can still do it this way to a smaller degree but with less risk. You do it this way often enough, you will become a big boy or girl and more risky or aggressive in your trades. You are simply covering your put write as opposed to being naked. Disadvantages: More commissions Profit potential is limited Advantages: Limited risk Less margin tie-up Next: Bear put spread Disclaimer: I am not advocating trading spreads or anything else. I coach in areas of option trading using money/risk/stress management and use spreads as one of the techniques for managment. Also, I am not suggesting RHAT as a trade. Simply using it as an example although I am looking at it for a possible trade. Til next time, please ask questions, clarify anything you read that may not be clear, or offer comments, suggestions, etc. jj