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.

Non-Tech : Any info about Iomega (IOM)? -- Ignore unavailable to you. Want to Upgrade?

To: Brent D. Beal who wrote (40495)	12/18/1997 5:08:00 PM
From: Ken Pomaranski	Read Replies (3) \| Respond to of 58324

<< I've noticed that the Feb25s, Feb30s and Feb35s are all selling for about $1 apart--35s are $1, 30s are $2, 25s are $3. Isn't this odd? ... it seems like a lot of people now are holding these way out of the money calls are just hoping for a miracle... >> This is what I've been trying to say for the last month or so, but it feels like I'm talking to a brick wall. Professional option players ALWAYS BUY IN THE MONEY CALLS. The Risk/Reward ratio is much/much higher. Example: Iomega common trading at 29 on about Dec 9th had the following prices for the FEB calls: FEB25: 5 1/2 FEB30: 3 FEB35: 2 Now, the amateur investor has $2400 to 'spend'. So what do they do.. with $2400, the following possibilities exist: (1) Buy 4 FEB 25s (2) Buy 8 FEB 30s (3) Buy 12 FEB 35s. ('lotto' method) Now.. what do you think the amateur will do? You guessed it! Go for the gusto!!!! They can retire with option 3, oh yea!!!!! Iomega will go to 100 in Feb!!!!! Now, the risk/reward profit table at expiry: IOMEGA COMMON 26 29 32 35 38 50 100 -- -- -- -- -- -- --- FEB 25 option -1800 -600 +600 +1800 +3000 +7800 +27800 FEB 30 option -2400 -2400 -800 +1600 +4000 +13600 +53600 FEB 35 option -2400 -2400 -2400 -2400 +1200 +15600 +75600 Notes: (1) Feb 25s are only a disadvantage if the stock rises more than 8 points by expiry (28% in two months, ~170% annual) ... wow!! (2) Not much difference between 30s and 35s, even way out there... and the 30s have much less risk. (3) Only one position keeps some of your money if the stock doesn't move (over any given time period, a stock has an 85% chance of rising with the market or less than the market..) (4) Given fact #3, and the fact that the 25s keep up with the 30s for most 'possible' moves, the FEB 25 position has 2 orders of magnitude better risk/reward profile than either of the other position. (5) Some math: Profit potential = (% chance close @ 26)(profit) + (% chance close @ 29)(profit) + etc.... etc... run these on each position. You'll find that the nearest in-the-money strike price will give you the best overall risk/reward.. The chance that the stock will rise more than 28% in two months is small enough to outweigh any advantage the 30s give you... kp