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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Elmer Phud who wrote (177862)	5/9/2004 7:13:18 PM
From: williamlp	Respond to of 186894

If we assume you wrote that option at fair market value then the value of the option is denominated in dollars but the obligation to deliver is denominated in time. Your shares will not exceed their present fair market value over that time so you do not stand to suffer any loss other than whatever decline the market may take over the life of the option. Neither do you stand to gain but that is considered upside potential or potentially "opportunity lost". The fact that holding a stock and selling a call behave together as a "thing" which is easily conceptualized doesn't matter. They are two distinct instruments. I can, of course, sell naked calls. The value of an option is... what someone is willing to pay for it. So, what was the monetary value of upside potential because that is the only loss suffered here? How is it calculated and where was it listed on the balance sheet? The value of this loss of upside potential is, by the definition of value, what someone is willing to pay for it. Again, a contract isn't on the balance sheet until it's written, which is irrelevant. (E.g. Money I borrow isn't on the balance sheet before I borrow it. When I borrow, I get cash, and gain an obligation to pay it back. This sure isn't income, just because I receive cash and don't have to pay until later!) The option is going to be on the balance sheet of the person who gets it, and the short call is going to be on the balance sheet afterwards, as soon as the option is traded. Others have suggested that it is factored into the share price but if that is true then the same shares Intel holds to back their options obligations have just dropped in value by the same amount that the options receiver has gained by receiving the grant. This is mental gymnastics. The shares are worth what the shares are worth, and the options are worth what they're worth. They can easily be traded separately. The net assets have dropped because a liability (the call option obligation) has been added. But the option holder will have to pay the original fair market value if he wishes to exercise the option, a price that is above the now devalued shares. It's a wash! The option can not be exercised without making Intel whole. There is and can be no loss. You don't really believe there can be no loss, or else you'd sell me options for half market value, wouldn't you?:) This is what's funny, that nobody who thinks options are not an expense would do this. When you view a stock/option combination as a single thing, which is the more complicated way of viewing it, you have at least one fallacy above. When exercising the option in the future, the shares that the option holder is paying for, at today's fair market value, are in no way devalued. Also, we're talking about present value, not value on the expiration date. At present, INTC's stock/option has nothing but downside. The combined thing won't be a loss if the price goes up, but it will be a loss if the price goes down. I.e. either the stock can lose value, or the option can gain value, never both. I'm sure you understand that the stock/option combination has to be considered worth less than the stock itself right now because part of the value of a stock is in its upside potential.