Just an idea

Discussion in 'Options' started by marwanco, Sep 13, 2009.

  1. marwanco


    Hi all,
    I have an idea, don't know how good it is:

    At last day of option expiration, I find a stock XYZ that trades excactly at 40$, call 40 will be around 0.05 (No intrinsic value)
    I Buy 10 contracts of Call 40 XYZ.
    Same time Sell 1000 XYZ.

    Now , If stock goes Up, I'll be break even - commission.
    Stock Goes down will make profit from Shorting shares-commission.
    Stock don't move , will have small loss = commission+option premium.

    Is Anything wrong here?, maybe buying more expensive stocks better, because there will be wider price spread.

    Maybe this strategy has a name in the books, but it could be done only when options value is very small 0.05 or less (is it possible??)

    Thank you for constructive critisizm.
  2. I haven't traded options in quite awhile but what you've outlined there provides 2 out of 3 options costing you money. You only win if the stock goes down. Make sure you can pick them that day.
  3. Quickly, the following thoughts come to mind - if the stock is fairly volatile, the option won't be .05 in the morning most likely - it might still have .50 value easily - if you wait until late in the final hour or so, then maybe it would be .05, but you better be quick on the trigger then and your stock would have to fall fast to likely make a profit. If the stock moves up, the option might not move up - for example, if the stock was at 40.05, the bid on the call could still be .05 and you would not make anything and need commissions to close.

    Also, if you buy an option at that point, it will probably have 0 bid and .05 ask so if you wanted to sell it back, you may not be able to.

    Also, if you wanted to do this, why not just buy a 40 strike put which would also cost .05 then? If you do your way, you have to deal with stock bid/ask and option bid/ask, and both commissions, but with buying the put, just the option bid/ask and that commission.

  4. spindr0


    You're not going to find many, if any, $40 stocks with ATM calls trading for 5 cts until late in the day (expiration).

    You'll will not make money if the stock goes up due to the cost of the calls (same as your stock doesn't move example.

    But if we pretend that you could find such scenarios with 5 ct calls, you'll have a lot of small losers and a number of larger winners.

    Get on a tradign simulator and see if you can make this work.
  5. marwanco


    Thank you for your reply,

    I will monitor the option/stock behaviour this friday.

  6. Sometimes, KISS rules!

    In fact, why not buy the straddle for 10 cents and get wealthy quickly :) /???