Hey guys, if ET members have enough power to move stock prices just because a symbol is posted by any member then please.... Check SWFT. This is an old transport company, not a biotech or software. To me is not a question of "if" but "when" that gap will fill, and with the way the major indices are acting I am impressed somebody has been able to keep it above $30.50 this long. Comments anyone?
#1 is actually not a very good way of profiting. At the money, you'll only have a delta of roughly .6. (i.e. you make money at 60% of the speed of the market) #2 doesn't make sense from a ratio perspective. If you knew it was going to move to 55, sell more puts than you buy calls. (to get the greater positive delta) Without going crazy on ratios, you could: 1) Buy a 50 call, sell a 50 put. (Synthetic long). delta = 1.0, unlimited risk 2) Buy a 50 call, sell a 55 put. delta = 1.6, unlimited risk 3) Buy a 45 call. delta = 1.0, $5 + premium risk In short, delta is king. If it's >1.0, you're making money faster than stock. If it's <1.0, you're making money slower.
Are you missing the leverage aspect from your deductions? If the OP wanted delta of 1, he/she could go long stock vs. synthetic or DITM call. Brain is mush so apologies for lack of coherence.
Well, the whole question is pretty meaningless. If you "know" the stock is going to 55--why would you want to take a limited risk by buying calls? If you want limited risk and the best potential profit, then buy a DITM call. If you're willing to take on unlimited risk, then selling the puts and using the credit to buy calls works. It gets you a >1.0 delta, but won't incur huge amounts of assignment risk since you're pretty close to the money on the sold puts. In other words, it's like a synthetic long, only with more delta. If the question were, "How do I make the most amount of money using the least margin", that would be an interesting excercise. Butterflies might work well with very little margin. Maybe just a vertical? Maybe computing your beta against a futures contract and buying those?
I would NOT buy OTM (out of the money) calls because time premium could shrink faster then the gain in a months time, several strikes in the money would be my suggestion. Also make sure you buy enough time on it (several months out). If your going to be buying large amounts make sure the particular strike your looking at has enough open interest SO YOU WILL BE ABLE TO EXIT! Not enough open interest could leave you stuck.. My 02cent worth trading_time
This really doesn't make sense either. Buying "several months out" will only reduce your deltas. Also, in this scenario, open interest is irrelevant. If you bought an ITM call, and the price got even more ITM, there's going to be no time value anyway, so just exercise them.
So are you saying even if there is no or very little open interest you could still get out? I do not know much about options...
Quote from trading_time: So are you saying even if there is no or very little open interest you could still get out? Once you own an American contract, you are free to exercise it whenever you want. When you bought the contract, you bought that right, whether the seller of the contract agrees or not. At some point in an options lifespan, the time value will decay to 0 (or the bid ask spread will effectively remove all time value). This can happen near expiration, or when your contract is significantly in the money. At that point, simply exercising the contract will deliver the underlying to you (call) or from you (put) at the price you agreed upon. You can then offset the underlying at the underlying's market (which presumably has more reasonable bid/ask spreads). If you bought a European contract, you either need to wait until expiration, or sell it on a potentially illiquid market, as you pointed out.
I agree the question is lacking some information that could have a bearing on the answer. Other than that, I really have no idea what you are talking about LOL. The OP's request was: "I'm looking for the biggest % return" Butterflies? Verticals? Beta against futures contract? DITM call? Seriously, my brain is total mush right now; I can't decipher what is going on. Long OTM call for most leverage. MoMoney.