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To: edamo who wrote (104278)	2/23/1999 4:58:00 PM
From: GVTucker	Read Replies (2) \| Respond to of 176387

<<cboe trader....would appreciate a real world example, so to better understand.>> Since this is the DELL board, I'll use the DELL Mar 90 options. At the close, buying a call would cost 3 3/4 and selling a put would generate 6 1/8 in proceeds. Net credit--2 3/8. From the trader's point of view, he has a net debit of 2 3/8. He goes out and buys the stock at the close for 87 1/16. Total cost: 89 7/16 (87 1/16 + 2 3/8). At expiration on 19 Mar, the trader is guaranteed $90. (If the stock is below 90, the puts get exercised against him, above 90, he exercises his calls.) The return for a 25 day investment is 9/16, or 0.629%, or 9.2% annualized, much higher than his cost of capital, and for a risk free trade at that. <<real world case...i sell puts against cash...get much,much,much better than t-bill rate returns on cash...market down my cash position same...never have to meet a margin requirement...i know my downside and the price i must accept at...no more, but less because the initial premium reduces my cost...i accept the underlying or the put can be restructured by rolling out to a more favorable strike and expiration, how do you suggest the same with a margined long position...>> You are comparing apples to oranges. If you are selling puts against cash, then you also have the cash necessary to purchase the stock. There is no need to margin to get an equivalent position. While you might get better than t-bill rate of return for the cash, you are taking risk to get that return. The fact is that the cost of that cash is 9.2% (the return on capital that you gave the trader)--this is a much higher rate than your borrowing cost would be in the securities business, even if you are a very, very small player.