An OPTIONS dilemma!

Discussion in 'Options' started by LMeyers, Aug 12, 2001.

  1. LMeyers

    LMeyers

    Please consider the following scenario:

    Company XYZ is currently trading at about $30 /share. I expect the stock to appreciate substantially - to perhaps about $50/share – over the next couple of months. I am considering buying options on the stock as it would give me much more leverage than purchasing the shares outright.

    Would I be better off buying the lower priced (Out of Money) Calls or the more more expensive At (or near) The Money Calls? The cheaper Calls appear to offer the best potential for price appreciation. However, the hefty spread that I’ll have to pay – buying and selling – would take a much larger chunk (as a percentage) out of any gains on these cheaper Calls.

    I would appreciate any suggestions/remarks/opinions from experienced options traders (& others). Thanks.
     
  2. If you really want to do well with options learn to trade spreads.

    Put close to at the money calls while selling more of the out of the money calls. Spreads are a lot more liquid on the floor that outright options.


    rtharp
     
  3. WarEagle

    WarEagle Moderator

    LMeyers,

    This free option calculator I came across may help you in your analysis:

    http://www.axone.ch/Calculators/MultiOptionCalc.htm

    Its java based and allows you to enter up to three different option positions at a time for comparison. You just put in the value of the underlying stock (in your case 30), and then the various strike prices, implied volatility, and initial price of each call you are considering. There are two boxes under the chart, where you can enter the price range for the chart. Then you can just click on the chart at various price points (your target of 50 or anywhere else) to see what the positions would be worth if the stock goes there. Adjust the days to expiration for when you think your price target would be hit and it will estimate the value of the calls at that point. You can see what your return will be from each strike you are considering if your scenario pans out.

    Hope that helps.

    Kirk
     
  4. Babak

    Babak

    put in a bid splitting the spread



    If I were you I would be more interested in the volatility of the options (where it is relative to its historical)

    http://www.ivolatility.com

    Why? because volatility is the most important factor in option trading. You can be absolutely correct about the stock increasing in price, yet if its volatility collapses in the same time period, you may actually lose money.

    What? you thought it was that easy to make money? hehe he

    I would suggest you get some further info on options. They are not such simple beasts.

     
  5. def

    def Sponsor

    if you seriously think the stock will rally 100%, maybe others do and then it should be no surprise that the OTM options have a wider spread (risk). If you suspect such a rally, you are after leverage and shouldn't worry about losing a few ticks on the spread. babak, is correct, you can work the order though and try to get a better price.
     
  6. The system I am testing also has option pricing and implied vols for options, as well as more risk management functionalities and real time feeds. It's called <a href="www.riskbox.com">RiskBox</a> and it's on free trial at the moment. You don't even have to enter your credit card to access it and it's web-based so no downloads for you modem guys! ;)

    It's definitely worth a try....

    If anyone has any cool new systems I'd also like to test them so send me a mail!

    Cheers guys,

    Duncan
     
  7. WarEagle

    WarEagle Moderator

    Duncan,

    You have posted your website in every post you have made over the last couple of days. If you are not spamming, and you've truely found a useful site, you only need to post it once. If you are just spamming for your site (which it looks like), take it elsewhere...no one here cares and it is easily seen for what it is.


    Kirk
     
  8. I just thought that it was useful and it seemed relevant to the questions asked.

    I wasn't trying to anger you - just thought I'd found something new from an article I read in FOW magazine so I thougth I'd share it!

    I'll remove my responses if you want though

    Duncan
     
  9. Htrader

    Htrader Guest

    Rtharp,

    Could you explain why option spreads are more liquid than the options themselves? Isn't it the same options, and wouldn't you incur the spread twice on the bull spread you described?

    Htrader
     
  10. def

    def Sponsor

    I totally disagree with rtharp. Spreads must be handled by a broker in the pit. Options that are on the autoex systems or traded on the ISE by market makers that honor their quotes offer instant executions. Thus if there is a market and you lift an offer you should get an immediate fill.
     
    #10     Aug 14, 2001