DRL offers a rare options play

Discussion in 'Options' started by Option Trader, Aug 3, 2008.

  1. The following came to my attention, and I followed my own advise already:
    You can sell 20 options of DRL, strike price of $2.50, expiration Jan 2009 for $.05. It is a non-standard option with a deliverable of 5 shares, meaning if you have 100 shares, you can sell 20 such options (you are covered) at 5 cents, totalling $1. The effect of the reverse split gives it the equivalent of a $50 strike price. If you are using a Penson broker, you can sell these options without the underlying stock, with very little risk of DRL going from $14 to $50 by Jan 2009.
     
  2. What I mean by the above is that Penson's margin requirement is no different than shorting 100 shares of the stock, noting the deliverable is 4 *(and if you short 20 contracts).
     
  3. yayt

    yayt

    Still, chances of it going down over a dollar seem pretty likely over the next couple months (I only see Jan 09 strikes)
     
  4. Correction, it seems the margin requirement for shorting 20 options is a little more, than if you buy 100 shares long then short the 20 options.
     
  5. There is no bid on those, only a top.
     
  6. Believe it or not there are takers.
    I have sold over 1k of them in under a week.
     
  7. There is always "little risk" on these type trades.

    Then, one day,...

    [​IMG]
     
  8. Most of my position I have the underlying stock; I sure wish this stock would go to $50, but realistically not to be expected. The point is the risk/return is way out of proportion, albeit I think DRL will go up nicely.

    Comparison: BPOP's bid is only $.05 for the Jan 08, 12.5 strike, and the stock is holding at about $7.25, i.e. to go up $5 they are betting $.05. For DRL, they are betting $1 (since you can sell 20 options for 100 shares) it will go up to $50 (20 times the 2.5 strike price)--a $36 increase, yet they are paying $1!!

    Anyway, the issue is moot, because most brokers will give you far better margining to hold 100 of the underlying stock for each 20 options you sell.