Picking a OTM option call for 2011?

Discussion in 'Options' started by professorkev, Jan 17, 2009.

  1. Anyone buying or have a reccomendation of OTM call for 2011 on a stick that probably had the snots beat out of it but will bounce back HUGE in 2 years? Say LVS being down to $5 when it was in the $100 range.

    I know it's a crap shoot, but figured I'd gamble $500 on some cheapo calls that have a good shot of running back up. thoughts?
     
  2. Of course, it's so hard to know and if you only pick 1 stock, you might get stuck with one that does worst. A while back when stocks had been beaten down, I bought some Mar/Apr calls on ADM, AA, IGT and KLAC to diversify. I made all my money back and more just on ADM and KLAC and later sold IGT for a small loss. I'm still holding AA.

    There are many good candidates right now of course, you would probably want to break them up into sectors and decide how you think each sector will do.

    Note: If you had asked this question a few months back, I would have went with DRYS, but maybe too late for that now!

    Here are some random thoughts
    Homebuilders - BZH has been pounded to $1.20s and has 2.50 calls for 2011. HOV would be another one. Not that I like these stocks, but they were quite a bit higher just months ago.

    Energy/Materials - Coal stocks like PCX come to mind if Obama doesn't bankrupt them. Maybe a Solar stock like STP? I also like CSIQ, but they don't have leaps. SOLF? A Beaten down oil exploration play like SD?

    Financial - Of course, there are the obvious like C, BAC, etc. I would be more worried about a financial going under however then some other stocks. You could use UYG (Ultra long ETF with leaps).

    Other random stocks to ponder for this:
    GNK? (Maybe too late like DRYS)
    AKS
    Of course GM and F, but I don't like them personally.
    CENX
    BEAV (no Leaps)
    TEX

    Of course, these are just some thoughts, and I'm sure I'm overlooking some ideas, but hopefully they will give you something to look at.

    JJacksET4
     
  3. dmo

    dmo

    Raw materials, agricultural commodities and energy have also been beaten down mightily - you could look at ETFs such as DBA, USO, etc.
     
  4. thanks guys, gioves me some ideas. I'm looking to hold them into late 2010 (depends on how they perform)

    DRYS, YEah I misse3d taht boat, Thought it would drop even more, into the $1 range or even BK,, Their debt worries me to hell!
     
  5. teun

    teun

    Energy forward markets haven't been beaten down that much. So it doesn't work for energy.
     
  6. dmo

    dmo

    This seems to be a very valid point and in fact I've been wondering about this and how it affects the ETFs. Common sense would seem to indicate ETFs hedge using forward contracts which, as you say, are historically expensive relative to spot.

    But looking at the ratio of USO and the front month crude contract, that ratio has remained surprisingly stable. My data may be a little off, but on the day of the all-time high 7/11/2008, the ratio of the closing prices of USO/CL was .806. At that point the forward contracts were much lower than the front.

    Yesterday USO closed at 29.86 and the front month crude contract settled at 36.51, giving you a ratio of .817 - amazingly close to the ratio at the high.

    Here's another way of looking at it: the recent low in front month crude was .22 of the high. The recent low in USO was .232 of the high. So again, pretty close.

    I don't really know how the ETFs hedge so I'm flying by the seat of my pants here, but based on the price data I have, USO does seem to have been beaten down as much as front-month crude.
     
  7. BZH $2.5 Call seemed like a good long shot..it is cheap, just treat is as a lottery ticket :)
     
  8. teun

    teun

    Yes, because USO uses spot (front month) contracts, not forward. But as they have to roll over the futures, in a contango market this is expected to cost money, which should be reflected (negatively) in the (future) share price.

    To say it in other words: when the price of spot oil will rise as the current forward curve indicates, the price of USO will stay the same as it is now because the cost of rolling over is exactly the same as the (opposite) effect of the increased spot price.
     
  9. When you're dealing with low single digit stocks, I think that it's a better play to trade the stock rather than buy an 2011 LEAP because you have so much more to overcome with the LEAP just to break even.

    For example, take BZH. The 2011 2-1/2 call at 65 cts (1/2 the cost of the stock) has a spread of 15 cts, a delta around 2/3 and in IV of around 115. With no change in IV, just to overcome the spread, the stock will have to move up 20 cts. While it's not likely, what if BZH went nowhere for 6 months? Or perhaps it went lower and took 3-6 months to begin to go up? Now you have some, but not much, time decay as well.

    And then there's the IV issue. If it contracts a bit because the housing market and/or the general market improves, you have even more to overcome in order to break even.

    So what do you think the chances are of scalping 20 cts or more with the stock several times in the next 6 months, even with 1/2 the number of shares that versus 2011 calls that you could buy with the same dollar investment? I'd say quite a bit better than with the calls.

    At $1.30, the stock is essentially a cheap call option.
     
  10. You all of course assume, that our current civilisation and all international markets will be still in existence ? :eek:
     
    #10     Jan 18, 2009