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

To: trev who wrote (710)	2/17/1998 7:24:00 PM
From: ----------	Respond to of 2241

Hello Trev. This must be the month for the Jeopardy TV show to try their new category. I can hear it now, "I'll take Options for $500, Alex." I'll probably miss the point of your question, but I'll try & explain some ground rules. There's a few here better at it than I am, & I'll gratefully accept any clarifications. First, the purchase of an option, be it put or call, is a cash transaction. Second, the writing of a covered call option is a cash transaction. The only transactions that must be done in a margin account are the writing of puts & the writing of uncovered calls. Now comes the hard part. Just because a transaction is done in a margin account does not mean there is anything marginible going on. I've had a margin account since about 1984. My total margin interest paid from 1984 to now is under $5.00 . (I think About $3.26, but not for sure.) And that amount came about over what turned into a rather ugly dispute because the firm had a more strict requirement than The Fed which I was unaware of until I got jammed for $3.26 . Regarding your question... there would be no new options issued on the stock. However, those options outstanding would be honored, per the terms under which they were issued. There are probably several examples of this. Take LTV, or Mercury Financial, or TWA a couple of different times. One day they are there, :::poof:::, the next day they are chapter 11. The calls expire worthless. The guy who bought puts makes a lot. The guy who sold puts pays a lot for what amounts to very rough toilet paper. Whenever I sell a put, I calculate my potential loss exactly that way... the difference between the strike price & zero. If I haven't got that much cash, I don't sell the put. When I buy a put, my maximum gain is the same, the difference between the strike & zero. Whether or not the stock is, was, has been, or ever will be marginible is irrelevant. Come judgement day, we all settle up. If the customer hasn't got it, then the firm makes good & they find a margin clerk in the East River. <g> Doug