Question on Option Buying

Discussion in 'Options' started by white_zombie, Dec 17, 2008.

  1. Folks,

    I would like to pose a question on how to buy options for certain scenario. Suppose I am bullish on a stock whose current price is 10 and I anticipate it to goto 40 in next 8 weeks. If it comes to 9 I will exit my position at profit or loss. If I want to invest $500
    which is the best option to buy

    1. profit scenario:

    should I be buying just out of money strike like 12.5 or far out of money like 35 or 37.5.

    2. loss scenario:

    suppose I did buy strike 12.5 or 35 or 37.5, which would loose the most when it move to 9

    What would be optimum strike to buy to maximize profit and minimize loss if possible ?


  2. First of all, hopefully I don't have to tell you that a stock going from 10 to 40 in 2 months is quite a long shot. Just buying the stock would make you 4 fold you money if it got there. When you say "If it comes to 9 I i will exit...", I assume you mean if it falls to 9 you will get out? In that case, it's very unlikely you would exit at a profit and you have to keep that in mind. Call buying can work if a stock goes up - and in that regard, it bascially never will work if the stock goes down even just slightly.

    On a stock that was at $10, I wouldn't think the 35 or 37.5 options for 2 months away would even sell. That shows what a long shot it is. Basically, the idea would be to figure out if the stock truely did hit $40, what the option would be worth at each strike amount - then compare that to the cost. For example, at $40 the 10 strike would be $3000. The 15 strike would be $2500, the $20 strike $2000, the 35 strike would be $500. Hopefully you understand why this is? Because of the intrinsic value. Then, you could compare the theoretical values with the stock at $40 to what you have to pay for each strike now.

    Again, if the stock moved to $9, I don't know if you would even be able to sell the 35 or 37.5 strikes for anyprice, making your loss 100%. In this scenario the 12.5 strike would certainly be a less % loss. You might also want to consider the 10 or even 7.5 strike to reduce the % loss.

    Without knowing more details such as the current IV of the stock, and your exact objectives, it's hard to give a precise answer, but most option buyers tend to buy either at the money options, or slightly in or out of the money options. If I was really bullish on a $10 stock, I might consider options anywhere from $7.5 to about $15 or maybe $20, but that would be a stretch for me (I would almost have to have insider info or something to do that far out). Over $20 for 2 months I wouldn't do personally.

  3. rosy2


    1) buy the 40 strike if its available.

    2) 12.5 strike goes down more. the more deltas the more its like the underlying
  4. 1. If the stock moves to $30, or even $35 right at expiration, the 40 strike will end up 100% worthless. A 12.5, 10.0, 7.5, or 15.0 strike will have plenty of value and likely very good returns. In fact, if the stock is at 39.50 with a few minutes to go, the 40 strike will be worthless. Only if the stock moves over 40 at expiration will there be gains at expiration. Of course, before expiration, the 40 strike could (but not certain) gain value on a rise in the stock that isn't up to 40 (but it might have to be alot).

    2. The 12.5 strike might go down more dollar wise, but percent wise, the 40 would do worse (again, not likely to be able to even sell it and therefore take 100% loss). The poster asked about $500 investment. If say the 40 strike cost .10 and the poster bought 50 of them for $500 and then it goes to .05 - that is a quick 50% loss (and that would be lucky as just the bid/ask spread will do that!). If the 12.5 was 2.50 and he bought 2 and it went to 1.75, the loss would be less.

  5. Hi and welcome customer :)

    Anyhow as a big fan of writing OTM calls and puts you need to remember one thing, Volatility. This is important.

    You could buy an option today and watch the value decay rapidly even within hours of buying those options.

    It can be quite upsetting to buyers watching the value decay even though the option is 2 points closer to the strike price than yesterday but your holdings showing a 20% loss.
  6. That is he worst possible idea.

    Do you understand how options work?

    Do you understand that a stock may not reach 40 just because you suspect it will?

  7. =================

    Also, i like long shots but i have been doing that all my life;
    and frankly like [closer]short shots- for sure easier to hit gamebirds that way.
    And box of 25 game bird shots costs about $5.00[ usd],not $500.oo

    Same principle trading as hitting game birds,cool. True, one can have fun even if missing lots of gamebirds;
    but more fun to hit /eat them,LOL . That's wisdom

    And while many stocks are over 50 d ma, thats bullish;
    Citigroup barely made that % down move all year;
    underlying , so C put made your % move scenerio, WhiteZ, but took all year..................................................................................
  8. rosy2


    the OG poster "anticipate it to goto 40 in next 8 weeks". So his best trade (most profitable) would be to buy as many 40 strikes as he can.
  9. Nonsense.

    If you buy lower strikes, you would be better unless the stock runs to 50.

    The 20s would be worth at least $2,000 apiece if the stock is 40.

    The 40's could be near worthless if very little time remains, or may be worth a buck or two.

    And how about all those times when he is sliglty wrong in his prediction? Surely expecting a move from 8 to 40 is not a scientific projection. What if the stock merely doubles? Why lose 100% of your investment by owning 40's when the purchase of cheap calls: perhaps 15s or 12.5s would yield nice profits?

    If you really believe buying 40s is the way to go, you are sorely in need of an options education.

  10. Well its folks like that who put money in the pockets of the Options writers :)

    Casino always has that house edge.
    #10     Jan 2, 2009