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Strategies & Market Trends : Canadian Options -- Ignore unavailable to you. Want to Upgrade?

To: Porter Davis who wrote (1396)	5/20/1999 10:06:00 PM
From: Daniel Chisholm	Respond to of 1598

>>a lack of potentially profitable short squeezes There's no potential profit in short squeezes if you're the one being squeezed. Yeah, I know, what I wrote does seem to imply that short squeezes are a good thing. Several times before committing my post I wanted to make a parenthetical statement that by "potentially profitable" I meant to the buyer of a call option (since we were discussing call option buyer's margin requirements), which therefore ought to reduce the amount of margin required to secure his position, but I thought it would perhaps obfuscate more than clarify (I think I already make too many parenthetical comments, my English writing reads more like a LISP program (don't you think so? ;-)). I realise this is all pretty arcane stuff, but consider one more fact. The risk in being short a deep OOTM option decreases exponentially as time goes by, but the margin is the same on a short position with one day to go as it is with one year to go. Sort of counter-intuitive, no? Even considering that margining is adjusted day-to-day? Let's say you're short call option A, which is $10 out of the money and has one year to expiry, and you're also short option B, on the same stock, which is also $10 OOTM (i.e., same strike as A), but it expires in five days. From the close of business the day before, you are properly margined. Now let's say that today's trading is abnormally volatile, and the stock closes up $3 (i.e., A and B are still OOTM, but only by $7 now). However much option B trades up, option A must trade up more (because it has more time to go), right? Is it this (necessarily larger) increase in A's value that you are referring to when you say that it is riskier than B? (By George I think I've got it! I just want to spell it out here, in case I've flubbed it) - Daniel