 BBS: Channel 1(R) Communications [ATI 2400 v.42]  617-354-7077
Date: 02-18-93 (14:45)              Number: 13468
  To: KIRT MCALEXANDER              Refer#: NONE               
From: JACK HOCH                       Read: NO
Subj: OPTIONS REPOST     2 OF 3     Status: PUBLIC MSG
Conf: Finance (52)               Direction: FORWARD            

Now, in-the-money options are less risky because they already possess
what is known as "intrinsic value".  For instance, the DEC 55 calls
in Case 1 are selling for $5 (really $5.50 x 100 = $550.00 plus
commission per contract).  The stock price of IBM is $60.  One DEC 55
call contract gives you the right to buy 100 shares of IBM at $55.00
between now and option expiration.  So, if the stock is at $60, you
could immediately exercise your DEC 55 call and buy 100 shares of IBM
at 55!  You could then sell the stock on the open market for $60.00/
share, immediately realizing a $5/share profit (minus commission).
But, since you paid $550 (really $550.00 + commission) for the right to
do this, you're actually out the commission and a little more.  Even so,
the option you're buying has an immediate "intrinsic value" of $5
per contract and is said to be "in the money".  That extra $0.50 per
contract you paid was the "time value" of the option.  Out of the money
options have no "intrinsic value".  They are 100% "time value".

Looking at Case 2 and assuming you bought the DEC 55 options as
priced in Case 1, you see you've again lost some money, but not
nearly as much as you would have percentage-wise had you bought the
out-of-the-money 65 calls.  In two weeks, the stock hasn't moved,
and your options have declined in value from 5 to 5.  The out of
the money calls went from  to 1/16 (worthless).

Now in most cases, for EQUAL AMOUNTS of contracts purchased, your
absolute loss is less with the out-of-the-money calls than with the
in-the-money calls, but the percentage lost is greater.  Again, I'm
ignoring commissions.


Out of the money:

4 DEC 65 contracts at  initially cost you $100.00.

After 2 weeks, this position is worthless.  You've lost $100.00
which was 100% of your invested capital.


In the money:

4 DEC 55 contracts at 5 initially cost you $2200.00.  After two
weeks the DEC 55 contracts are priced at 5.  You've lost
4 x 100 x (5 - 5) = $200.00 which is only 9% of your invested
capital.


You can see your financial commitment was greater with in-the-money
options and your absolute loss was greater, but your percentage
loss was much smaller.

You must be saying, "gee, with all the losing examples we've had, why
would anyone want to buy call options"?  Well below is an example of the
plus side of it.  The following table shows all December positions
profitable at expiration:


CASE 4:    IBM  last trade: $70.00, at Dec. expiration.
Contract   Price      Contract   Price      Contract   Price
Dec 55      14 3/4      Jan 55     15        Mar 55    16
Dec 60      10          Jan 60     11         Mar 60    11
Dec 65       5          Jan 65      6        Mar 65     7

Remember those DEC 65 call options we bought for  in Case 1?  Well,
they're worth 5 now!  You can calculate the % gain on that one.  The DEC
55s we bought at 5 in Case 1 are now worth 14 3/4!  Another hefty
gain!

I'm assuming for this example that the stock price moved up 10
points in two weeks.  That's a lot, but certainly not unheard of.
Had it moved up a more modest 5 points in that amount of time, all
the options would have been profitable except for the DEC 65s.

Now, I haven't talked about the January or March series, but you
can look at the tables and see for yourself how the option prices
behave with regard to underlying stock price over time.

When I buy options I tend to buy those contracts that are
in-the-money and longer term.  I'll be getting less leverage, but
I'll also be reducing my risk.  Personally, I still think there's
plenty of leverage in options which are 4 to 6 months in length and
3 to 5 bucks in-the-money.

In this example, had I bought one MAR 55 call in Case 1 (initial
investment 7 x 100 = $725.00 before commission), with the
stock moving up 5 points in two weeks (Case 3), I would have netted
a profit of 11-7 = 3 3/4 x 100 = $375.00 before commission.  Had I
bought 100 shares of the stock instead, I would have made a $500
profit in the same amount of time, but on an investment of $6000!


Monetary gain:    option = $375.00
                  stock  = $500.00

Percentage gain:  option = 1100/725  x 100 = 52%
                  stock  = 6500/6000 x 100 =  8%

>>>>>>>>>>>>> Continued >>>>>>>>>>>>>>         <groan!>
