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

To: Spaw who wrote (25319)	8/4/1998 10:07:00 AM
From: Greg Thornton	Read Replies (1) \| Respond to of 36349

Spaw, The difference you guys are arguing about is absolute gain vs percentage gain. If you buy options at $3, they have to move $3 in order to double. If you buy options at $1, they only have to move $1 in order to double. Should be obvious -- I think that this is the difference between your two view on in the money and out of the money options. But, I could be wrong... Greg GOOOOOO PAIR!!

To: Spaw who wrote (25319)	8/5/1998 2:29:00 AM
From: Rainmaker	Read Replies (3) \| Respond to of 36349

Here's how I evaluated PAIR options. Let's say I had $5,000 to invest and expect PAIR to move to 26 before the January 1999 expiration. For discussion purposes, I will use the LAST SALE premiums listed on cboeopt for PAIR based on today's market close. (Other numbers can be used since they move relative to the stock price throughout the day, but let's use these numbers.) To simplify calcs, all broker transaction fees have been omitted (if this were only the case in real life.) For five Gs, I can pick up 3478 "shares" or 34 Jan. 15 contracts at 1+ 7/16 ($1.4375). I break even when the share price reaches $16 + 7/16. Assuming my target price goal of 26 is attained and I exercise my options and immediately trade at the 26 price. This will yield a net increase of 9 + 9/16 points or a net profit of [(26 - 15 - 1.4375)] x 3400 = $32,512.50. For the Jan. 17.5s, I can pick up 4211 "shares" or 42 contracts at 1 + 3/16 ($1.1875). Once again, when the stock reaches 26, I exercise my options and immediately trade at 26. The net increase this time will be $30,712.50 [(26 - 17.5 - 1.1875) x 4200]. For the Jan. 12.5s, I can buy 1818 "shares" or 18 contracts at 2 + _ ($2.75). When I reach 26, the net increase will be 10 + _ or a net profit of $19,350.00 [(26 - 12.5 - 2.75) x 1800]. Clearly, the Jan. 15 options will yield the greatest return. But the Jan. 17.5 options also give a healthier return vs. the Jan. 12.5s. This model only works if we expect a high upside movement in the stock - stock price greater than twice the option strike increment (2.5 points each increment for PAIR right now). If we are expecting movement of less than one increment before expiration, this model will not work. In that case, buying in the money or at the money would be the obvious choice. I do believe that PAIR will move above 20 in the next 3 - 6 months. And if the heavy buyout rumors become reality (at 24 to 28 based on PEG x 99 EPS estimates), options can bring significant returns. Because of the time premium for the January options, buying at a strike higher than 17.5 IMO is not a good choice (at the current low stock price). One should never buy options with a strike that is higher than one's stock price goal (obvious) or go SO deep out of money to make the investment a real gamble. For gambling fun, meet me in Vegas. BTW, I too have not purchased any options yet. Might make a move Wednesday prior to the Thursday FCC meeting. Thinking about August in the money options to make a few pennies on the expected positive news from the meeting. I will likely trade the option and not exercise.