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Biotech / Medical : Sepracor-Looks very promising -- Ignore unavailable to you. Want to Upgrade?

To: Bob Swift who wrote (999)	7/11/1998 5:01:00 PM
From: Biomaven	Read Replies (1) \| Respond to of 10280

Bob, Assuming the calls are priced efficiently (which they almost always are), none of these strategies is "better" than any other. Basically they trade off risk and return - you can get lower risk and lower expected return or higher risk and higher expected return. You can think of the call premium as having two parts. The first reflects the carrying cost of the stock (i.e., the margin expense you save by buying a call instead of the stock); the second reflects the premium you pay for having a limited downside risk - at most you can lose only the few dollar premium instead of the entire cost of the stock. A useful insight is that buying an at-the-money call and writing a similar put is theoretically the same as buying the stock on margin. (Just as writing the call and buying the put is like shorting the stock - a "synthetic short.") From a practical side, any time you trade options you get hurt by the large spread. Thus buying a call and writing a put is in practical terms much worse than just buying the stock on margin, assuming you have the margin available. (The synthetic short version of this is a little different, because options are generally priced assuming you can get interest on your short proceeds, which us little guys can't do). Bottom line is your expected return buying a call is worse than just buying the stock, but your risk is lower. Buying a deep-in-the-money call is very much like buying the stock - you'll see that the premium is lower. If you can stand the risk, you are better off just buying the stock on margin. Hope this helps. Peter P.S. I just noticed I got the 1000th post!