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

To: Esteban who wrote (642)	2/2/1998 3:37:00 PM
From: Madpinto	Read Replies (1) \| Respond to of 2241

am I correct in thinking that the time premium for the further in the money put is less because the risk of loss (size of total premium) is roughly double with the 17.5 than the 15? The time premium for the further in the money put is less because the risk of the stock going over 17.5 is less. The time premium works like insurance. It protects the buyer and obligates the seller. It may help if you look at selling a put in a different light. If you bought stock and sold the 3/17.5 call, your position would compare to a 3/17.5 short put position. This OLD example illustrates my point. GE trades at $106 and pays a $0.52 dividend with a X-div date of 3/4/97. The Mar 110 calls are 1 1/8 bid and the Mar 110 puts are 5 bid. 26 days to expiration. Interest rate 7%. Writing the calls once- If the stock does not move we would collect 1 1/8 in premium or $112.5. We must put up 1 $106 times 100 shs less the premium received. (106100)-112.5=10,487.5. Multiply this number times the days to expiration (divided by days in the year) and your interest rate. In this case we have 26/364 .0710487.5= 52.4375 or about $52.44. Now add back in the dividend that will be paid before expiration (3/4) in the amount of $52 ($0.52100). You collect a grand total of $112.06 (112.50 + 52.00 - 52.44) Selling puts- Intrinsic value of the put is the strike less the stock or $4 in this case. We sell the put for $5 so the premium is $1. Multiply times 100 and we get $100. Note- I did not include commissions. In this case an extra commission could make a real difference. Also, I assumed the money received from selling the put does not receive interest. Lastly, The stock would actually drop to $105 « after the X-div. This does not change the calculations. Caution- This method has some flaws. Certain conditions may occur that invalidate this comparison. Use common sense. If the difference between the two scenarios widens to unusual proportions, then this comparison probably does not apply. The ablitiy to exercise options early can drastically change these calculations. This example is from one of my previous posts and is not current. IN NO WAY IS THIS INTENDED TO BE USED AS OR CONSIDERED A RECOMMENDATION FOR TRADING GE OR ANY OTHER POSITION.