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Technology Stocks : PSFT - Fiscal 1998 - Discussion for the next year -- Ignore unavailable to you. Want to Upgrade?

To: Melissa McAuliffe who wrote (2533)	10/5/1998 10:08:00 PM
From: kas1	Respond to of 4509

> Well, how often does it happen that the stock is put to > you before expiration obviously, depends on what happens to the stock price. but it is very tempting to exercise something that's in the money and may not be in the money much longer. clearly, from black-scholes and the like, we see that the difference between what you can get by selling the put, and what you can get by arbitraging the discount (strike price minus normal market price), converges to 0. as it goes to 0, it becomes more and more tempting to exercise those puts. no easy answer here. but the basic reason puts get exercised earlier than calls is that stocks tend to go up with time, and people who buy puts know that.

To: Melissa McAuliffe who wrote (2533)	10/6/1998 10:08:00 AM
From: TimeToMakeTheInvs	Respond to of 4509

Melissa, just my two cents worth, I would consider just dabbling in a very minor way with options until you get your hands around all the nuances. This way you will learn about them while limiting your risk. They can be dangerous, and people sometimes pay quite a price for the lesson. That said, for a knowledgeable investor they are another quiver in the bow. (Not sure if I qualify as a knowledgeable investor or what! Have been buying a little stock lately that was significantly out of the money. <g>) tim

To: Melissa McAuliffe who wrote (2533)	10/6/1998 11:07:00 AM
From: Just_Observing	Respond to of 4509

How often is stock put to the seller of a put before option expiration? Options have both intrinsic value and time value. For very deep in the money puts, the intrinsic value can be much greater than the time value. Then, the chance of getting the stock put to you increases sharply. However, this is not a random event. One can easily identify the conditions under which such an event can occur. From the current price of an option calculate the time value. For example, the PSFT April 25 put trading at 7 to 7.5 and the current price of PSFT being 21 has a time value of (7+7.5)/2 -(25-21) = 3.25. Only when the time value of an option is much smaller than its intrinsic value and on the order of the spread, does the chance of getting the stock put to you become substantial. For example, the Oct 35 put for PSFT may trade for 14 to 14.5 when PSFT is trading at 21. The time value is negligible (0.25) and put owners may exercise this option before expiration rather than sell it (to another to benefit from the time value of the option). To summarize, only when the time value of an option is negligible compared to the intrinsic value and also smaller than the spread, then there is a good chance it may be exercised before expiration. This is a simplified model for predicting when stock gets put to you (there are few exceptions that can occur). I hope this helps. Good Luck.