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.

Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe -- Ignore unavailable to you. Want to Upgrade?

To: alanrs who wrote (27)	8/12/2001 9:59:07 AM
From: Dan Duchardt	Read Replies (1) \| Respond to of 1064

ARS, Volatility is always a consideration. It's just hard to know ahead of time how it will project into the future. It's great to be able to buy low volatility and sell higher. That makes for a good entry, giving you the best chance for a profitable trade. You can play around with different volatility assumptions with the Hoadly analyzer. If there is no entry in the "Implied Volatility" field, the evolution of the profit curve seems to be governed by the setting from the list of stocks page that appears in the upper left on the main page. If you put in Implied Volatility, that takes over. (I've had trouble using the little VolatilityCalculator at the right, but it seems to work if I change the days remaining to expiration to zero. It also seems to be affected by the setting of the graph increment. 1.0 seems to be best while doing the volatility calculation. Then you can set it anywhere) I think there are a couple of ways of looking at the 5 vs 10 question. Someone asked a similar question and I replied at Message 16198635 There were bigger dollar differences involved in that case for a six month out long call, but the thinking is the same. As you say, reducing your cost outlay is not a bad way to go in this market. Also, that lower cost improves your rate of return if the trade works out well. Rate of return is one way of comparing the two cases. Another way is to think of the following scenario. Consider a vertical bull call spread, buying the 2004JAN5 and selling the 2004JAN10, but give yourself the advantage of being able to sell the 10 at the ask. Does that spread look attractive to own? In the case of NTAP, my data shows that it would cost $2.10 to open that spread. You could lose all of that, but only if NTAP drops to $5 and never comes back before January, 2004. For 10 or above, you will make $2.90, a 138% return in 2 1/2 years. Not bad considering you can make it even if the stock drops 30%. BUT, the evolution of this thing will be incredibly slow. If you actually opened this spread all by itself, and watched the value of it as price changes over a couple of months, you wont see much change unless NTAP makes huge move. If NTAP were to take a serious dive, say to $5 or less, the value of the spread would drop by $1 or more. Doing your ratio write on NTAP with the 2004JAN5 would be equivalent to doing it with the 2004JAN10, plus owning the vertical spread described above. If that spread is not attractive, don't buy it. Go with the 2004JAN10. If NTAP dives, at some future time you might find that same spread to be more attractive (well not quite the same; can't sell at the ask this time unless you are patient or lucky) and can in effect add that spread by rolling your long 2004JAN10 down to 2004JAN5. If that doesn't happen for another year, you might even roll down and out the the 2005JAN5. I know that you have been looking at some of these spreads on stocks that you own. For anyone else reading this, don't forget that a ratio write of this sort loses money if the stock runs up too high. The position is equivalent to a bull call diagonal spread, plus a naked call. Since the gain on the spread is capped, and the loss on the naked call is not, eventually the loss will outrun the gain. But if you own the underlying too, it becomes a covered call, plus a bull spread. That increases the downside risk somewhat, but it also raises the profit potential. You can think of it as using the premium collected for selling the covered call to pay for the bull spread. Good luck with whatever you decide to do ARS. Dan