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<DIV><FONT color=#000000 size=2>I am fairly new to writing covered calls and
naked puts, however so far I have been intrigued by how powerful these
techniques can be in order to extend and lock in profit on existing holdings
(selling slightly out of the money covered calls), and also to capture premium
and/or buy desireable stock at very low prices (selling out of the money naked
puts not minding if they are ultimately exercised against you). </FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT color=#000000 size=2>I think there is a substantial trade opportunity
associated with option pricing on Netscape puts relative to AOL and would like
to solicit comments from any of you that are experienced with selling naked
puts. The proposed trade is described below:</FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT color=#000000 size=2>Background: As you may be aware, AOL will
buy Netscape by exchanging .45 AOL shares for every Netscape share, deal to be
closed sometime in the early spring. Netscape stock shares are currently
selling at about a 8% discount to AOL shares - Friday's close gave AOL at 175,
and Netscape at 73 (should be 78.75 based on the .45 factor). The discount
presumably reflects the fear factor that the deal will not go through and
Netscape stock will plummet, although I personally think this is an extremely
low probability. Also of interest is that AOL will split its shares on Feb
22.</FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT color=#000000 size=2>The basis for the proposed trade is that the
Netscape put options are selling for almost 2 to 1 relative to the AOL options
on an equivalent share basis! Consider the following trade:</FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT color=#000000 size=2>Write 2 Mar 70 NSCP puts @ 6.25 each, or 12.50
total premium received. If the puts are exercised against me in March, I
will be obligated to purchase 200 shares of Netscape at 70, however my real
price basis after including premium received will be 63.75. Netscape at
63.75 translates into a price of about 141 for 100 equivalent AOL shares, which
is quite a discount to the existing price of AOL at 175. Even if we have a
substantial correction, I would not expect to see AOL much lower than this,
especially after the split. So in other words, getting exercised against
is a good thing, I do not mind buying AOL at 141 at all, or 70.5
post-split. If the market stays high and the puts expire unexercised, then
I keep the premium which is a nice $1250 profit with little risk.</FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT color=#000000 size=2>If I take the same approach selling AOL puts
directly, the closest equivalent trade is to write 1 March 145 put at
5.125. If exercised, I buy AOL at a cost basis of 145-5.125 = 139.875,
again not too shabby. Again if the market stays high, I keep the premium
but make only 512.50 profit for the same amount of option.</FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT size=2>I don't think it is important as to exactly when the
AOL/Netscape deal is done, as the option and share prices will be converted
automatically whenever it happens.</FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT size=2>I would plan to write the Netscape puts during the next market
downturn, as the put prices will likely move temporarily higher.</FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT color=#000000 size=2>The above trades can be done at other strikes
and/or expiration months depending on how one wishes to bet, however the
disparities between Netscape and AOL are the same. </FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT size=2>I would be interested in any comments/feedback on the
above.</FONT></DIV>
<DIV><FONT size=2></FONT> </DIV>
<DIV><FONT size=2>Dan</FONT></DIV></BODY></HTML>
</x-html>From ???@??? Sat Jan 30 22:38:33 1999
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From: Ronald McEwan <rmac@xxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Subject: Option Program Bug
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I apologize to those who requested the Options Program and were not able
to run it. I just learned that I need to "Package" the application for
distribution. (I am still in the learning stage of VB). Unfortunately
after I do this I think it will be to big to email. When I finish the
package I will ask John B. if we can get on the site for download. I will
keep you posted and let you know when it will be available.
Ron McEwan
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