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.

Pastimes : Tidbits -- Ignore unavailable to you. Want to Upgrade?

To: edamo who wrote (148)	6/13/2000 1:54:00 PM
From: AmericanVoter	Respond to of 1115

ed, yes, I looked at the numbers without considering the interest paid on margin or collected on sitting premium... thanks for your clarification best regards amein

To: edamo who wrote (148)	6/13/2000 4:28:00 PM
From: PAL	Read Replies (1) \| Respond to of 1115

i'll ask pal to comment on this....assume you have $1m cash...this will easily allow you to purchase $2m of common stock on margin. if you were to sell the qcom 02200 @ 123, for 50 contracts, you would receive 615k of premium, add this to your 1m and you have a cash position of $1.615m....against this cash you have incurred an "economic obligation" of $1m should the qcom be assigned. you receive t-bill/money market against your cash, whereas if you went long 5k or 10k shares of common, you have either no return or a 1m margin debt, accruing interest.... ed ... you can go even further. the $ 1m is much more than enough for coverage for economic obligations of 5K shares of QCOM at $ 200/shares. The $ 615K is free money that can be used anyway you want, even to buy QCOM outright, and even better: on margin if you want. the "old" approach: based on current market value which is still used by practically all brokers (Tom K's assertion that software changes will be huge), is good for DITM short puts. Unfortunately this approach is defective since a person will be penalized if the stock is so far OTM and everytime the stock rises, the more margin is needed!! the "new" approach: based on strike price makes more sense, hence I suspect CBOE rectifies "old" method. With your $ 1M example, you have enough more than enough coverage under both rules. Since currently, the "old" method is used by the majority of the brokers, we hould just go along and take advantage of defect, and when they change the rule (in the middle of the game), we can always recalculate the position, and cover the short puts for profit. ____________________________________________________________ Is there an advantage of buying outright vs short put? Yes, if you hold it long term, then buying outright has a tax advantage. I will present the risk and reward of this DITM short put in later post. best regards paul