Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: chic_hearne who wrote (108021)	4/27/2000 3:51:00 AM
From: Petz	Read Replies (2) \| Respond to of 1576166

chic, re:<married puts> Well thats a new one on me! But there's two problems I see. First, you said, 2) exercise all 20 and buy 20 Jan 2001 $50 puts. You will be taking $90,000 on margin for the shares and $10,000 for the puts. The Jan 2001 $50 puts are going for 4 1/2 by 4 3/4. You can buy the puts and pay for all commissions for $10,000. This will increase you to $50 margin and $32 equity on your AMD shares. Your date to establish long term gains would start today. You would not have to take any short term gains in early 2001. In essence, you would convert your $45 call options that expire today to Jan 2001 $50's call options. Only $5 extra, to; gain an extra 9 months, take no margin risk, keep all 2000 shares, start your long term cap gains now, and avoid short term cap gains for year 2000. A hell of a deal if you ask me. The first problem is you are not really taking no margin risk. You are starting out at $50 margin and $32 equity. Thats only 39%. If your equity drops to 30%, you'll get a margin call from your broker. That could happen with as little as a $10 drop in AMD's price. You could sell some of the puts, but that would partially destroy the tax-advantage and the puts would only be up $2 on a $10 drop in AMD. Without buying the puts, you would have $37 equity and $45 margin. You could withstand a $17 drop in AMD's price before you get a margin call. Speaking of margin calls, I doubt your broker will allow anything less than 50% margin in a case like this because it is a "concentrated position." Make sure you check your broker's rules. They may be applied in an ad-hoc manner and maybe they'll give you the benefit of the doubt. A couple weeks ago, my broker suddenly decided that my account required 50% margin at all times because of the huge NAZ correction! Another problem is that the cost is probably more like $8 rather than $5 because you have to cover yourself after January as well. But if AMD were over 120, maybe you wouldn't bother. The fundamental problem I see is that the strategy doesn't protect you against catastrophic loss. If AMD declines slowly to $50, you are left with no gains and worthless puts. It only starts to beat exercising and holding the stock if AMD declines below $45. Personally, I would find out how much margin my broker will allow as the "maintenance" amount on a concentrated position and sell just enough calls to exceed that by 15% and exercise all the rest. I'd sell 20% out of the money, two month out calls five or six times until next May and buy them back shortly before expiration. The way I figure it, if a 50% decline were to happen, it wouldn't happen overnight. I'm more worried about losing my profits than losing my house. Petz