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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Windseye who wrote (23925)	4/5/1998 1:23:00 AM
From: Tim Wash	Read Replies (4) \| Respond to of 97611

i am considering doing a bull put spread on CPQ. i have never done spreads before though, so i would like some opinions on the following from those who have had experience at it. it all seems ok on paper, but i would like to know if i am missing anything. i am willing to bet that CPQ will be a $45 - $50 stock by jan 2000, and i want to get the most bang for my buck. here is the spread: sell the jan 2000 50 puts on CPQ for 23.875, and buy the jan 2000 35 puts on CPQ for 11.25. here is the rundown assuming $10,000 investment: i may not have used the correct terminology, but i hope you can follow my example: case 1 capital: $10,000.00 target stock price: 45 upper put strike price: 50 lower put strike price: 35 upper put sell price: 23.875 lower put buy price: 11.25 months til expiration: 22 interest rate: 3 strike spread: 15 premium difference: 12.625 premium/spread percentage: 84.17% cost: 2.375 no of shares you can bps: 4211 cash into account: $53,157.89 cash in account: $63,157.89 interest earned: $3,473.68 maximum loss: $6,526.32 maximum gain: $53,157.89 breakeven stock price: 37.375 gain at target price: $32,105.26 basically i figure the following. if CPQ is below 35 by jan 2000, you lose $6,500 ($10,000 - the interest you earned in the meantime). if CPQ is 50 or above by jan 2000, you make $53,100. i have other parts of my portfolio in buy and hold. i want to do this bull put spread with speculative capital to leverage my money with limited risk. i am fairly confident that CPQ will be a $50 stock by jan 2000, and is a good bet. is this example do-able? and what are the opinions on it? and never having actually done this before, though, i have a few questions. what is the possibility that the stock will be put to you prior to expiration? if this happens, am i correct in that you can simply sell the stock which was put to you, and sell the jan 2000 50 puts again to re-establish your position, with the only damage being done the difference between the bid-ask price you pay, and the additional commisions to reestablish the spread? also, are there any possible pitfalls which i have overlooked? thank you in advance for any help which any of you can offer. tw