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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: Thomas Stewart who wrote (600)	1/25/1998 9:47:00 PM
From: ----------	Respond to of 2241

Hello Thomas: I hope both you & Patriot do not mind my 2 cents worth. Your question reminded me of an economic theory question in a money & banking course. For simplicity sake,If your leap costs $1.00, and it loses 1/16th the first month, it lost 6.25% of it's value. The last month it is down to 1/16 & expires worthless. The last month it lost 100% of its' remaining value. So yes, it loses more the last month than the first. (This however, is meaningless....unless your filling out a schedule D. <g>) Your question looks for an answer that, like economic theory questions, "assume all other things are constant". You could go to Excel, do a linear regression on the price & get a nice scale of depreciating value. But it would nean nothing, because the only thing constant in the world is change. I go through the exercise you are inquiring about everytime I want to roll an option. I look at the price of the current position, and compare the prices of the alternatives. You can trade time for money or trade money for time. Personally, I want at least 2:1 for a roll. If I have an ABC Jan99 30 call, then I'll roll to an ABC XXXX 25 call for a net debit of 2 1/2. There is no way to tell you what day this spread will occur. It just ain't gonna happen. If you have access to data where you can put in conditional statements that will alert you to these spread opportunities, then you can wait for your screen to alert you. I've never looked at it from starting with a buy to open. I'm usally on the sell side to open. The ONLY thing that saved some of my can in the 4th quarter was playing "roll, roll, roll your options, gently down the calendar". I assure you, having done it for real, if there was anything even remotely resembling an formulae I could construct to continually duplicate those options gains, I'd own the web instead of paying to access it. <bg> Doug

To: Thomas Stewart who wrote (600)	1/25/1998 10:22:00 PM
From: margin_man	Respond to of 2241

Hi Thomas, <<<The rate of change in price of an option is expected to vary throughout the life of the instrument, no?>>> Yes. <<< So that the option, say an out-of-the-money LEAP call, will loose less of its value proportionately in the first month than in the last month (assuming that the value of the underlying security is steady.)>>> You're right. You also notice the out-of-the money option loses its value a lot going into the expiration week. Sorry I don't have a real answer for the roll-over strategy. For me, I just keep the options until expiration. Regards, Patriot

To: Thomas Stewart who wrote (600)	1/26/1998 12:13:00 AM
From: Madpinto	Respond to of 2241

Is there an optimal time to sell, say a leap, to replace it with a contract that has a later expiration date--even paying a premium for that later expiration date--to avoid that accelerating loss of value that occurs as a contract nears expiration? If there were an optimal time to sell, investors would sell it and it would no longer be the optimal selling point. At every instance in the option's life, the market should value it fairly. Theoretically, no time should have an advantage over another.