Theodore A. Andros and Joan B. Andros - Page 27

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          difference between the exercise prices of the purchased and sold            
          puts, and the minimum value is zero.                                        
               According to Mr. Natenberg, the amount of money or credit that         
          Tandrill received upon the establishment of all six of its credit           
          spreads was always substantially outside (less than) the range of           
          values indicated by the Black-Scholes Model. In addition, the               
          amount of money or credit that Tandrill received upon closing out           
          the two debit spreads through Arbitrage Management was always               
          substantially outside (less than) the range of values indicated by          
          the Black-Scholes Model.                                                    
               Mr. Natenberg analyzed Tandrill’s trades based on a comparison         
          of the trade prices with two numbers:  The maximum possible value           
          of each vertical spread if held to expiration, and a price                  
          evaluation of each spread using the Black-Scholes Model. See                
          appendix E for Mr. Natenberg’s Trade Analysis.  Mr. Natenberg               
          concluded that Tandrill’s options trades were done at prices that           
          “practically ensured that they would result in a loss.”20                   

               20   Mr. Natenberg gave as an example Tandrill’s first                 
          trade, on Sept. 20, 1979, where the partnership sold the                    
          97.50/97.625 put spread 47 times.  He stated that if the price of           
          the underlying Treasury bill were at or below 97.50 at                      
          expiration, the spread would have a maximum value of $58,750.  If           
          the price of the underlying Treasury bill were at or above 97.625           
          at expiration, the spread would be worthless.  At the time the              
          trade was made the Treasury bill price was 97.45.  Because this             
          price was below 97.50, there was, in Mr. Natenberg’s opinion, a             
          far greater chance for the spread to be worth at expiration its             
          maximum value of $58,750 than its minimum value of zero.  Thus,             
          according to Mr. Natenberg, the value of the spread should be               
          closer to $58,750 than to zero.  Mr. Natenberg confirmed this by            
                                                             (continued...)           




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