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

To: ---------- who wrote (660)	2/6/1998 8:03:00 PM
From: Tim Fierro	Read Replies (2) \| Respond to of 2241

Hello All, I am new here and want to pose this scenario: This is only for illustration, I have not really done this. I am only interested in how this works if I 'had' wanted to do this. Stock: OPTI Bid: $ 6-5/8 Ask: $ 6-3/4 Sep 7-1/2 Bid: $ 11/16 Ask: $ 1-1/16 The High for this stock has been $ 7-7/8 and I think this stock will cruise right up past the high with a good rally in the next 6 months. Over the next few months the stock really does inch it's way upward and finally around June 1st, it hits $8.00. From what I understand, if I buy the Sep 7-1/2's, I would be out the total cash of $ 106.25 for buying 1 lot of 100. Is this correct so far? Now I can either excercise the option and this would mean I have the 'option' to purchase 100 of OPTI for $ 7-1/2 even though the current price is $8.00. Or I could keep holding on to the option hoping to let it go even higher to say maybe $9 if I was confident it was still going higher and then excercise it as long as it is before the 3rd friday of september hasn't come yet. Am I right so far? Now I think I understand the top portions, but the portion I don't get is this: I can also 'trade' this option which I would gather means that I would sell it back into the market at the going rate. Over time since I bought this on Feb 6th, the price of this particular option must be slowly degrading in value because who would want it? I get lost right about here. And even if I do trade/sell the option, who is going to buy it and is there a market that will absorb it; IE: if nobody wants to buy it and I don't want to shell out the 100 shares @ $7-1/2 to actually buy the shares, what happens? I suppose in my thinking if nobody wanted to buy the option or should I say me sell it back into the market, then I would have to excercise the option to get the shares at $7-1/2 and immediately sell into the market at the $8.00 current price. My basic questions are really: Is there liquidity in the market to take my option back when I am done with it and want to just cash the option. Is this profitable or does the price erode so that it is worth the same price as what I paid for it back in Feb. I bring this up because I read in here that someone said it was beneficial to trade the options versus excercising them. Tim This is an edit afterwards. I was just thinking that actually the price of the option DID increase in value because while looking at quotes, I noticed them higher near the date of expiration. I hope I get that part. Ok, so that leaves a final note of: Does that market maker / specialist 'have' to honor the BID of the option and buy it back from me?; IE: Someone 'has' to buy it back because they work this particular option? I have only begun reading the CBOE files to understand how options work so if I am off base on the flow of how it works, it is because I am learning. <g> Tim