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

To: Tim Fierro who wrote (661)	2/6/1998 8:48:00 PM
From: Carl Fritch	Read Replies (2) \| Respond to of 2241

You seem to have a good grasp of how it works... I will try to answer the rest your question. If the stock is higher than $7.50 the option will have some value and there should be a market for it. I'm hedging here because I suppose it is possible to not have a market for a thinly traded option. The closer to expiration you get, the less "time value" the option will have. In the money options are always worth at least the difference between the strike price and the current stock price. You always have the potential to make more money by selling the option and not buying the stock. The trick is to have the stock move enough to make the option worth more than you paid for it before it expires... This is the gotcha that hurts all option players. A good way to look at an option price when considering it is to add the price of the option to the stock strike price. This will tell you how much the stock has to be worth for you to "break even" on your purchase of the option... then to make a profit the stock has to move even farther...You also have to consider the commission costs in all of this as well. The biggest problem we have (people who are playing options) is we tend to overestimate how far a stock can move at any given time or worse guess wrong about the direction of the move. Even if you are very good at Technical Analyses you will guess wrong about the direction of a stock price many times when you are trying to follow a stock. Hope this helps Good Luck Carl Fritch

To: Tim Fierro who wrote (661)	2/7/1998 3:40:00 AM
From: ----------	Read Replies (2) \| Respond to of 2241

Tim: 1) $106.25 is correct, assuming no transaction costs. 2) Correct again. You have the right to exercise the option any business day you darn well please up to expiration. Or, you can hold. 3) In the scenario you describe, yes, there is liquidity. An option has two basic value components: 1) Time Value 2) Intrinsic value. 4) Hop over to the CBOE options page & plug in a favorite stock. Look at the bid & ask on the options. Sure, you will see some options with "no bid" simply because they are so far out of the money nobody wants them. (Or, they are out of the money but expire very soon.) 5) In your example, your option has intrinsic value of 1/2 ($50.00). I don't recall you saying when the stock got to $8.00 . If you had a month or two left, you would most likely have a little time value added to the price as well. The options market is SORT of like the NYSE. As long as there are willing public buyers & sellers, the specialist just sort of watches & keeps the action orderly. When there is no public bid or ask, then the specialist is charged with "maintaining an orderly market" in the option. This means he must buy and/or sell from his own account. Mr. DePinto, who frequents here, enlightened me on something that has proven very beneficial. If I enter a "market order" the specialist posting a bid or ask for his own account is obligated to fill at least 5 contracts at the posted price before he/she may change it. (In my limited experience, it seems most will do 10, but 5 is all they have to do.) On other occasions, I tried to get "cute". If the option was Bid 3/4 Ask 1 , I would put in a buy at 7/8. The only thing that happened was the board changed to Bid 7/8 Ask 1. I thought the specialist was just uhhh "hosing me". Then I remembered... he now had a bona fide public bid, so he was following the rules & posting it. Sorry to digress. But yes, there is a market for anything that has intrinsic value. The amount of time value that should be in an option is a source of endless debate, countless models & equations, none of which mean a darned thing. <g> Finally, I will relay a real experience. I had an option expiring that was $1 in the money, (I mean expiring in LESS than 15 minutes!) The bid was only 3/4. I couldn't get filled at $1. It made me SO MAD, I entered an "exercise & liquidate" order. Financially, this was dumb. I cannot exercise & liquidate an option for $25.00 . It is 2 transactions... cost me $80.00 . BUT, I knew the &^#$%@! on the other side was going to have the exact same ticket charges as I would & it would cost him/her more than the $25.00 he/she was trying to hose me for. In short, I was willing to play fair, but if the guy wanted blood, he was going to get cut himself getting mine. (This happened perhaps 3 years ago. Never seen it happen to me since. Of course I've stayed away from index options for 3 years, too.) Hope some of this helps. Doug Hope this helps.