Very new to this. I think a stock (Example: MMR) will rise a lot higher by January 2010. It's trading at $4.95 right now. Would buying the $5.00 strike @ 1.45 be the right thing to do or is there better long call options? TIA
If you truly believe this stick is going to rise substantially, then the $5 call option is a reasonable choice. But, why bother with the options? Why not buy stock instead? I truly recommend stock in this situation - unless you fear that the stock price may collapse if whatever it is that you expect to happen doesn't happen. If the stock moves to 8, your option (at expiration will be worth $3). That's a 100% return. But it's only $1.55 per option and buying the stock would return $3.05 per 100 shares. Options are wonderful investment tools for reducing risk, but there's already very limited risk in buying stock priced at $5. It would be a shame to see the stock move to $6; 20% higher and for you to lose money because the call may only be worth $1.00 (depends when the stock reaches $6) - resulting in a loss. Mark http://blog.mdwoptions.com/options_for_rookies/
Thanks Mark, Makes a lot of sense. The example I used was a poor one but it was the one I had up on the screen. I'm also watching a basket full of high priced oil stocks falling from the sky. I think by January 2010 they will be above their recent highs. Just need to learn how to buy the correct options. Still studying.
Just remember: There is no 'best' option to buy. Much depends on you, your style, how aggressive/conservative you want to be etc. You want to strike a balance between not paying a lot of money for the options (ITM) - just in case the stock tumbles - and not wasting too much on time premium (OTM) - just in case the stock doesn't rise far enough. Mark