Registered: Aug 2012
10-07-12 06:59 PM
Why not go out with Options?
I get why we like options- because we can make good returns if our predictions turn out as expected, but...
I've heard often that going far out (that is to say buying contracts that don't expire this month or the next, but in the months following those), is costly to profits because of the "time premium" that you pay too much for. That it's better to just go out the next month or so. But the math I do just doesn't always add up that way.
We can take a look at Sony SNE. It is currently at 12.00 per share.
I think Sony has been down for long enough and is due for a turn around, so I would like to profit from it.
I still haven't figured out how to use a black shole's calculator (or better equivelant), and I don't yet fully understand the equations that go into the rate of decay, as the expiration date of a contract draws closer, but I can still look at the current prices being offered. This is what the boards are showing me.
And please tell me if I'm missing something.
I can buy JAN 9.00 calls for about $320. If the price stays flat for the next two months, It would still be worth $315 (a loss of $5).
I know it will be worth approximately $315 because, If I were to try selling a my JAN contract two months from now, the date of sale would be Dec 7. Selling a JAN contract on Dec 7 would be exactly the same as selling a NOV contract today (even though I couldn't today because it's Sunday, but I hope you still get my point). If were to sell a NOV 9.00 strike call today, the contract is worth approximately $315, or a $3.15 strike price for 100 shares.
So I can see the rate of gains and decay buy looking at the prices this way.
If it goes up $2 per share in 2 months then my contracts will be worth about $510( a gain of $190). If it goes down $2, then my contracts are worth about $130 (a loss of $190)
When I compare that to buying the NOV calls instead, the scenario goes like this: a 9.00 call costs about $315. If it stays flat for 1 month, the contracts will be worth about $300(a loss of $15) If it goes up $2 per share in 1 month, then the contracts are worth about $500(a gain of $185). And if it goes down $2 in 1 month, the contracts will be worth about $105(a loss of $210)
Again, I can deduce the prices by looking at the price charts. Selling a NOV contract 1 month from now, would be exactly the same as selling an OCT call today.
I have to keep in mind I have only one month to make gains if I buy the NOV calls- any more time than that and the rate of decay accelerates too fast and begins to crush the price of my contracts.
When buying the JAN calls, as opposed to NOV calls today, it seems I would have:
1. more time to reach my predicted price level, or recover from a further dip.
2. better gains when the price goes up.
3. less decay if the price stays flat or goes down.
In this instance, if I were to buy SNE calls today(or tomorrow, rather, on Monday), it would seem to me that buying the JAN calls would be a far superior buy compared the NOV calls.
I am asking that someone tell me I'm wrong, and then tell me why I'm wrong, because I'm pretty sure I have to be wrong. I always am wrong, but I just I can't figure out why this time.