Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Ascend Communications (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: James A. Shankland who wrote (60096)	2/22/1999 8:07:00 PM
From: Alok Sinha	Read Replies (1) \| Respond to of 61433

You are right in the respect that it gives the same profit. I am not too sure about the risk. Writing in-the-money option risk makes it closer to a long and short position in the underlying stocks. Also as the deal approaches close date, both the option premium and arb difference come down, and one could technically close the positions without having to pay too much in option premium (above the intrinsic value). The out-of the money seems riskier (and also provide better return), since if LU moves substantially, one of the option values will be close to worthless while the exposure from the other continues to increase. (I consider the option premium obtained at the time of writing them irrelevant to the decision once the bets have been placed - sunk cost analogy). If LU moves substantially above 120, I am effectively short at 120, while the ASND puts don't offset any exposure. The deep-in-the-money option have the advantage of being a hedge over a wider price range, But the flip side is the maint req will be huge since the broker is not going to consider the offsetting effects. So all things consdered out-of-money option may be the way to go as it ties less capital. If the stocks do move substantially one would have to sacrifice some of the premiums and buy some furter out-of-money calls to protect. Also the broker commisions on the deep out of money contracts would be stupendous. Thanks for your response. I may do this tomorrow at LU July 125s (9), and ASND Jun 70 (6) or ASND 65 (4 1/2). Regards Alok