BBS: Channel 1(R) Communications [ATI 2400 v.42]  617-354-7077
Date: 02-18-93 (14:45)              Number: 13467
  To: KIRT MCALEXANDER              Refer#: NONE               
From: JACK HOCH                       Read: NO
Subj: OPTIONS REPOST     1 OF 3     Status: PUBLIC MSG
Conf: Finance (52)               Direction: FORWARD            

Reposted by special request:

Recently on another net, I was asked by an individual to help him
understand a little bit about options.  The next thing I knew, the
stock market was boring and I had expurgated, from the inner
workings of my cranium, a 3 message litany on options.  I've decided
to post these messages here in RIME Finance in the hopes that there
may be some lurkers who've always wanted to know something about
options but were afraid to ask.  I figure this will help make up for
my pseudo MIA status over the past couple of months <G>.  Pardon any
mistakes I may have made.

I don't know your familiarity level with options, so I'll attempt
to explain the basics as they relate to call options.  First, some
definitions.

Exercise:         The process of converting an option to its underlying
                  stock.

Strike price:     The stock price at which an option becomes exercisable.

In-the-money:     An option which you can immediately exercise to buy
                  the underlying stock.

Out-of-the-money: An option whose underlying stock has yet to reach
                  the 'strike price'.

At-the-money:     An option which is reaching the point where it can be
                  exercised.

Option price:     The price you pay to buy or sell an option contract,
                  not including commission.

Time value:       That component of option price which decays to
                  zero over time.  It is the premium you pay for
                  the present and/or future right to exercise your
                  option once the strike price is reached.

Intrinsic value:  That component of option price which reflects the
                  true value of your option at expiration.

Let's say you are interested in buying call options on IBM, and for
our purposes we'll say that the stock is trading at $60.00 per
share.  It's early December.  Opening up the paper and looking at
the options page for IBM might reveal something like this:


CASE 1:    IBM  last trade: $60.00, 2 weeks before expiration.
Contract   Price      Contract   Price      Contract   Price
Dec 55      5«         Jan 55     6«         Mar 55     7¬
Dec 60      1          Jan 60     3          Mar 60     4
Dec 65      ¬          Jan 65     1«         Mar 65     3


CASE 2:    IBM  last trade: $60.00, at expiration.
Contract   Price      Contract   Price      Contract   Price
Dec 55      5          Jan 55     5¬         Mar 55     6«
Dec 60      1/16       Jan 60     1«         Mar 60     3¬
Dec 65      1/16       Jan 65     3/4        Mar 65     2


CASE 3:    IBM  last trade: $65.00, at expiration.
Contract   Price      Contract   Price      Contract   Price
Dec 55     10          Jan 55     10«        Mar 55    11
Dec 60      5          Jan 60      6         Mar 60     7
Dec 65      1/16       Jan 65      2         Mar 65     3


Again, these prices are totally hypothetical.  Anyway, you can see
that you have 3 series of call options (a series covers those options
of like expiration months).  The further away from the time of
expiration, the more expensive the option price (due to time value).

Now, if you wish to assume lots of risk, you'd be interested in buying
those option contracts which are furthest "out of the money" and closest
to expiration.  In Case 1, that'd be the DEC 65s.  They only cost
$0.25 per contract (1 contract is equivalent to 100 shares of
stock, so if you buy one contract you really pay $0.25 x 100 =
$25.00 + commission).  However, what you're really buying is the
right to purchase IBM stock at $65/share any time between now and
the 3rd Friday of December, which is the date upon which the
December options expire.  If IBM has not reached $65 or greater by
the time of expiration day, the options expire worthless.

Case 2: IBM stock is trading less than $65/share at the time of
December options expiration.   You can see what has happened to the
price of the DEC 65 calls.  It has fallen from ¬ to 1/16 (which is
really zero).  You've lost 100% of your investment.

Case 3: Now, let's say you bought the DEC 65 calls for ¬ two weeks ago,
and it's now options expiration day.  We'll say IBM is trading at $65
per share.  Even though the stock reached your "strike price" of $65,
the options you hold are pretty much worthless.  Why?  Because no one
wants to pay a premium for the right (which expires today) to buy IBM
stock at $65 when the stock is trading at $65.  There's no profit
in it.  So, you've lost 100% of your investment once again.

            >>>>>>>>>>>>> Continued in next message >>>>>>>>>>>>>>