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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: James F. Hopkins who wrote (3223)	2/13/1998 7:56:00 PM
From: Wallace Rivers	Read Replies (3) \| Respond to of 78595

AOL: The complete opposite of a one way toll bridge with very limited barriers to entry in its core business. Seeking much higher prices for its services than rivals; some have said for inferior product. Would you pay 100+ times earnings with obscene PS and PB ratios? Ridiculous!

To: James F. Hopkins who wrote (3223)	2/15/1998 5:18:00 PM
From: Allen Furlan	Read Replies (1) \| Respond to of 78595

Options strategy as value investing.Didnt mean to be curt with you but response was meant to be helpful because I did not know you had experience. I have been writing(hardly ever buy) options successfully for 5 years and before that unsuccessfully for about 5 years. My experience earlier was trying fancy strategies like butterflies and ratios of options to options. Generated many dollars worth of commissions but not much for myself. Let me analyse your proposition and would appreciate your reply. First let me say that I have developed option pricing formulas based on assumption of normal distribution and recognizing the markets tendency to evaluate puts at different volatility level than calls. Using these formulas and an assumption of 6.2% standard deviation for puts and 7% for calls both for a one week interval I compared current market prices and verified the formula against actual prices for March, April and July AOL options. Using the mean value of CBOE closing prices on Feb 13 your proposal would result in the following cash position in your account: Sell 100 share AOL +1145 Sell 1 March 105 put + 291 Buy 1 July 115 call (1518) Proceeds +10198 If you hold the position until March 20 the following values would accrue(I know that adjustments can be made during the interval but my experience is that whipsawing is just as likely as a successful rollover): Stock closes at 95 105 115 125 135 Close short (10500) (10500)(11500) (12500) (13500) Sell call 500 859 1383 1983 2537 Feb 13 proceeds 10198 10198 10198 10198 10198 Net less 80(com) 118 477 1 (399) (845) Seems like a good strategy only if you are confident that stock is heading down. I agree that AOL is way overpriced but dont like to argue with momemtum players.