Replies to post #18322 on Advanced Micro Devices Inc (AMD)

[I_banker]

Alan and HailMary,

You are both correct in a sense. HailMary is correct is saying a cobination of a purchased call and a written put is similar to owning the stock. The catch of course is higher transaction costs and higher spreads, because the market is less liquid and you will not be able to make the difference in the bid/ask.

Where HailMary goes astray is:
1) you will at best get 1-2% interest on your money (current money market rates).

2) You will also be required to post substantial collateral when you write a naked option. This is equal to the option premium + 25% of the strike price + The amount the option is in the money.

3) It will be very hard in reality to find a stock that is trading a precisely the strike price at the time you wish to enter the trade. As a result, the intrinsic value premium on one side of the trade will be higher than the other and this will ruin your very thin economics.

For a discussion on options you can read the standard MBA text which is "Corporate Finance" by Modigliani & Myer; Chapter 14.

[Elmer Phud]

HailMary, personally I would avoid this strategy because it would require buying options and I find that very distasteful <G>.

God willing, my short positions will expire tomorrow on the following:

AMD Nov $13 Puts
AMD Nov $14 Puts
INTC Nov $25 Puts
QQQ Nov $30 Puts.

Then I start nursing December short positions in

EMC Dec $13 Puts
EMC Dec $15 CCalls
AMD Dec $14 Puts

Think I might write some QQQ Puts here too.

[alan81]

From your example...
I think it illustrates the error in your thought process. You mention using both put and call options priced at $0.75 with a strike price at the current stock price. To get the same option cost for the same strike price requires that the stock not appreciate over time, which means it is getting zero average return. In reality, on average the stock appreciates over time, resulting in the cost of the call being greater than the cost of the put. Check out almost any heavily traded options and you will notice this. This is what I meant by the cost of the options are slightly adjusted to "make up" for the average x%/ year gain of the stock.

Are you arguing that my assumption that stocks on average appreciate?

As you mentioned, with your strategy you could, with no capital whatsoever, create infinite wealth by writing these synthetic stock options. Does that really make rational sense to you? Where is the money coming from?
--Alan