DRL offers a rare options play

[Option Trader]

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.

 

[Option Trader]

Quote from Option Trader:

... 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.

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).

 

[yayt]

Still, chances of it going down over a dollar seem pretty likely over the next couple months (I only see Jan 09 strikes)

 

[Option Trader]

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.

 

[thegazelle]

There is no bid on those, only a top.

 

[Option Trader]

Believe it or not there are takers.
I have sold over 1k of them in under a week.

 

[Wayne Gibbous]

Quote from Option Trader:

..you can sell these options without the underlying stock, with very little risk of DRL going from $14 to $50 by Jan 2009.

There is always "little risk" on these type trades.

Then, one day,...

 

[Option Trader]

Quote from Wayne Gibbous:

There is always "little risk" on these type trades.

Then, one day,...

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.