Buying deep OTM calls. Worth the risk?

Discussion in 'Options' started by klurby, Nov 6, 2011.

  1. klurby


    Alright so I was just looking at some deep otm calls on AAPL. I saw that the AAPL Dec 17' 11 $500 Calls are trading 0.16 Does anyone here just purchase a few of these contracts and hope that AAPL rallies huge? I know the reward can be huge if something crazy happens. Please let me know if you guys ever try any of these plays. Thanks.
  2. ASE1245


    From my experiance, if you buy calls like that often, most of the time they will expire worthless. From time to time, the .16 call will go to $1.00, but you'll sell out at a double, .32. Not a good way to make money.
  3. cqm


    10 other people will be clamoring to sell that contract to you

    there's a reason for this....
  4. MTE


    Sure, why not, but you have to realize that you are gonna lose most of the time. I think it is best to place these into earnings so that it ends up to be a sort of a binary bet - you either win or lose, there is no in-between where the option doubles and you sell out, and thus miss the rest of the move, as noted above.

    Essentially, it's no different to what Taleb does, except that in your example you are betting on an individual stock rather than the whole market.
  5. bc1


    Sounds to me like buying a lottery ticket or betting on a long shot at the Derby.

    Sure wouldn't be worth more than just a few dollars a month. It will be a drag on your account and expectancy and if you only hit it once in a hundred times, it may not pay enough to cover your losses. You wouldn't do very many contracts, one maybe, and then add on commissions and the price goes up. Probably best to always stick with your basic strategy because if you gamble once here or there, you will be inclined to do it more until your portfolio is spent.

    That said, it is Christmas time and the Ipad may or may not be a big seller. I don't have the slightest idea if Christmas sales could drive the stock price up and what that strike price would be around Dec 17 however. One contract would cost me $16 plus $13 commission to buy it and another $13 commision to sell it. Breakeven on a one contract winner is .42 so it would need to be above .42 to profit. If it doesn't reach above .42, then it would expire worthless and it wouldn't need to be sold so I then end up with a $26 loss. I'll let someone else have that trade.
  6. Crispy


    There is a time and place for deep otm options. I play them occasionally when my model says an issue has a high probability of making a big move in a short period.

    I disagree with the gambling analogy regarding this particular strat. Everything we do has gamble in it. Keep total risk small and pick your spots just like any other approach.

    So to answer the question "worth the risk?" I dont know...what does your model or strategy say about it?
  7. spd


    LOL, so true.

    If you have reason to believe there may be a wacky move in a certain stock, go ahead and buy a handful as a pure gamble. But framing a strategy around buying big lots of deep otm options, no way.
  8. I'm at the track and one horse has one its last 4 races and the other is 200 to 1 and has never placed in the top three. Yeh, either bet is a gamble but one is a lot more likely to pay off.
  9. Crispy


    I get yer point. But a lame horse will always be lame. I cant see when betting a 200-1 horse makes any sense at all. Outside of criminal activity of course..:D. However betting a 20% move in an underying stock makes sense under the RIGHT circumstances.
  10. Monthly options dated out-- no.

    Weeklies in certain stocks that have a high tendency to move thru strikes and pin on expiration Friday-- completely different story. There are unbelievable and unique opportunities that exist here... if u know how to read a chart-- the exponential returns possible in the last hr of trading are phenomenal due to IV crush, time decay and gamma.
    #10     Nov 7, 2011