On Mon, Feb 21, 2000 at 02:37:25AM -0500, Gerald Oskoboiny wrote:
> [...] I'd like to find a way to benefit from CMGI's
> impending rise without risking a lot more money.
>
> So from what I've heard, it sounds like this is a great chance
> for me to get into options trading (which from what I understand,
> basically lets you make bets about stock prices that pay off
> better than simple investments if you're right.)
>
> Except I don't know much about options yet so I need to do some
> reading first. Does anyone have site/book recommendations?
> (or personal experience?)
I found what seems to be a good site for learning about options:
http://www.cboe.com/
http://www.cboe.com/education/
but I didn't get much further than a few paragraphs before my
eyes glazed over... not in the mood for this kind of reading
today apparently.
(CBOE is Chicago Board Options Exchange, where options actually
get traded, cf. NYSE.)
So instead I looked at E*Trade's current quotes for CMGI options,
and tried to figure out how options work by playing with the
numbers mentioned in this thread from before:
> Related to this is an interesting/entertaining thread I saw the
> other day, the better bits included below:
>
>
http://boards.fool.com/Message.asp?id=1080158007259000
>
> > Author: mgmitch
> > Subject: mgmitch gonna do it again??
> > Date: 2/12/00 9:22 AM
:
> > [...] What I am thinking about is putting the entire 50K into
> > CMGI JAN01 175 options. [...] I figure I can get between
> > 28 and 30 contracts at these prices. I have no doubt in
> > my mind CMGI will be a 250 to 300 dollar company by years end
> > making my options at least worth 4-5 times todays value, but I also
> > think we could be worth 500 by expiration making me nearly a
> > millionaire ath the age of 20.
:
>
http://boards.fool.com/Message.asp?id=1080158007259029
>
> > Author: erkaye
> > Subject: Re: mgmitch gonna do it again??
> > Date: 2/13/00 2:09 PM
:
> > There are a ton of things I want to say, but just look at the trade
> > logically. You are trying to multiply your money by 20x. You will
> > about break even at a $192 closing price on the underlying CMGI.
> > That is 70% from here. To hit your goal requires over 300%, that is
> > over $450/share. It seems likely you can break even, and possibly
> > make some money, but making $1mm looks like a stretch. The more
> > realistic trade would be the other side of your trade
E*Trade currently has quotes like this for CMGI options:
(that is, for LEAPs, or long-term options)
Jan-01 calls Bid Ask Last Vol Black-Scholes Leverage %
XCKAM 165 21 23 23-1/4 0 29-59/64 0.41
XCKAN 170 19-3/4 21-3/4 22-5/8 0 29-1/32 0.42
XCKAO 175 20 20-3/4 20-1/8 27 28-3/16 0.64
("Black-Scholes"!? Whatever...)
I learned on the CBOE site that these things are traded in
100-share blocks. So the last line quoted above means a single
contract of Jan-01 175's would cost $2075 (the Ask price
multiplied by 100 shares.)
This contract would entitle me to obtain 100 shares of CMGI at
$175 each in January 2001.
So if CMGI is worth less than $175 in Jan 2001, this contract
would be worthless and I'd have wasted $2075.
In order to break even, CMGI needs to be about $196 per share
next January, when my right to buy CMGI at $175 a share would be
worth about $21/share, slightly more than the $20.75 I paid for
the contract.
If CMGI is at $200/share, my gain would be:
(200-175) * 100 - 2075 = $425
Other possibilities:
CMGI's price Net gain on Gain from buying
in Jan 2001 one contract of CMGI's stock
Jan-01 175's instead at $120
$ 155 $ -2075 $ 595
175 -2075 935
195 0 1275
196 25 1292
197 125 1309
198 225 1326
199 325 1343
200 425 1360
220 2425 1700
240 4425 2040
260 6425 2380
280 8425 2720
300 10425 3060
350 15425 3910
400 20425 4760
450 25425 5610
500 30425 6460
So... I wonder if I should go for Jan-01 175's, or buy a few
different contracts (175's, 165's) in case CMGI's price doesn't
appreciate the way I think it will.
And I wonder what the heck Black-Scholes means...
Oh:
http://www.datek.com/popinframe.html?ref=/helpdesk/glossary/bfglosb.html#black_scholes_option_pricing_model&navNumber=3
| Black-Scholes option-pricing model
| A model for pricing call options based on arbitrage
| arguments. Uses the stock price, the exercise price, the
| risk-free interest rate, the time to expiration, and the
| expected standard deviation of the stock return. Invented
| by Fischer Black and Myron Scholes in 1973.
Looks like I had it right the first time... "whatever"
I should be able to figure out where that "Leverage: 0.64%" value
comes from, but I'll skip that for now.
And of course there are all kinds of other options, these are
just the ones I'm interested in now.
--
Gerald Oskoboiny <
[email protected]>
http://impressive.net/people/gerald/