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Strategies & Market Trends : Telebras (TBH) & Brazil -- Ignore unavailable to you. Want to Upgrade?

To: Ted Jackson who wrote (401)	11/12/1997 10:38:00 PM
From: Aaron Weiss	Read Replies (2) \| Respond to of 22640

Ted, As it turns out, there is an options software thread on SI! I'd check it out before you buy anything: www3.techstocks.com As for Option Vue, I think they're at www.optionvue.com. A few minor points: A "straddle" means a combination of both a put and a call with the same strike price. If one of the "legs" (leg = a single component of an option combination) is way out-of-the-money, then the other leg must be deeply in-the-money. Example: If I buy a TBR 100 Call and a 100 Put (with TBR @85), the 100 Call is way out-of-the-money and the 100 Put in deeply in-the-money. Note: when "putting on a straddle" (i.e. buying one), you generally want to have the strike prices of the put and call coincide with the current stock price. This gives you the most "symmetry" in results if the stock moves up or down by x points. The only way to buy a position where both the put and call are out-of-the-money would be to purchase a "strangle", which is the combination of a long put and call with different strikes (the call's strike price being greater than the put's strike). If I bought a 80 put and a 90 call, that'd be a "strangle". Again, when you "put on a strangle" you want to buy puts and calls whose strikes are roughly equidistant from the current underlying stock price. If I thought it were a good idea to buy a strangle on TBR, I'd buy the 80 put and the 90 call, preferably when TBR was right at 85. The adjective "deeply", in my experience, is only applied to in-the-money positions. "Deep" usually refers the large amount of intrinsic value in an option's market price. As for your hypothetical scenario of one leg doubling while the other falls by 50%, the crucial question is how much of a move would that require and how quickly? You may find that, for a very high IV (Implied Volatility) position, it would require a huge move in the stock (like +/- 40 points within a few weeks). The actual profit graph of a straddle (x axis = stock price, y axis = profit/loss) looks somewhat like a bowl. Options with very high IV's have profit graphs which look like very flat bowls (or a stretched out "U"). Therefore, it takes a substanital move just to move from the center of the bowl to one of its "walls". The walls represent profit. Each day, the bowl moves down since the position's value decays on daily basis. As you approach expiration, the bowl slowly turns into a "V" with the apex of the V at the strike price of the put and call combo. The apex of the "V" is the negative sum of the put and call prices (meaning if the stock was right at the strike at expiration, the position would expire worthless and your loss would equal the total put and call premiums you originally paid). You may also find that, right after you purchase the position, the option's IV shrinks suddenly (because the stock has settled down and the pro's have started to short the expensive puts and calls in size). A sufficiently large drop in IV can quickly halve the value of your position rather suddenly without warning, even though the stock itself has only temporarily settled into a trading range. So, even if you're right about the move, the sudden falloff in IV alone can offset whatever profit you would have made! Sorry about the long-winded reply, but believe me since 80-90% of long option positions are losers, you really need to understand about how options are priced before you think of taking a long position. Understanding volatility and time decay is essential to making money in options (unless you just want to use them like lottery tickets). Caveat Emptor!