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Biotech / Medical : Agouron Pharmaceuticals (AGPH) -- Ignore unavailable to you. Want to Upgrade?

To: Barron Von Hymen who wrote (3323)	12/15/1997 8:21:00 PM
From: Lee Solomon	Read Replies (2) \| Respond to of 6136

When you sell/buy an option there does not have to be an investor buying/selling on the other end. When you open your brokerage account you sign a paper that allows your brokerage firm to take the opposite position from you. Let's run it down from the beginning: (Disclaimer: This is only a hypethetical situation. I have no knowledge of the actual events that took place. I only offer this senario for discussion so that we can see what forces actually exist in the market and try to guess what effect they will have.) On Oct 28 AGPH takes a dive down to 40. Some investor, will call him Barron, thinks the price will rebound quickly and sells 4000 NOV 97 40 Puts for $4. For his trouble Barron receives $1,600,000.00. As long as AGPH stays above 40 through Nov 21 Barron gets to keep his cool 1.6 million. Things look pretty good until Nov 21, option expiration day, when what do you know the price just happens to drop below 40. Now Barron must move fast because if he is exercised he'll have to come up with $16,000,000.00 to buy 40,000 shares of AGPH. It just so happens that the DEC 97 40 Puts are trading within 1/8 of the price for the NOV 97 40 Puts. So Barron rolls his 4000 puts into DEC. He does this by buying back the NOV and selling the DEC. It costs him $50,000 out of his 1.6 millon. So far everything is OK. Well that turned out not to be a good move because now it is Dec 10, the price has tanked and those DEC 97 40 Puts are now worth 11 bucks. To stay alive Barron decides to buy back the DEC 97 40 Put and sell the FEB 97 30 Put for $4 each. Barron spends 4.4 million on the buy back and receives 1.6 million for selling the FEB 30 puts. This time the net cost is $2.8 million. So instead of being up $1.6 million Barron has now spent $2.8 million. Well I guess that is better than 16 million. "So what's that leave us with?" Barron is VERY BULLISH on AGPH and his brokerage company is doing everything they can to make it cost him money. Now that Barron has spent $2.8 million that clears the way for AGPH to trade up to $37 before the broker starts loosing money.