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When is the best time to buy a call option

  1. I'm trying to figure out the best time to buy a call option.

    Is there any way to predict what an option will do.

    For example if silver is at 12.82 with three months to expiration I buy a call $4 away from the money how much will this option increase if the price of silver increase by $3.

    Or how much will the price of an option increase if silver jumps $1.50 in one week.

    I'm trying to figure how options will move in different scenarios. Is there any way to get an idea of what will happen.
     
  2. The delta of the option tells you exactly this. But also realize volatility changes, and time decay can offset these changes as well.

    ie, a $17 option for silver might have a delta of 30 3 months out. So a $1.50 move in silver would change the option's value by $.45. Also realize delta changes as it gets closer to the money; that is what gamma tells.
     
  3. I strongly advise a good book on options before persuing further. You need to understand delta, gamma, theta, and vega or you're gonna be eaten alive.
     
  4. you know of any places on line to read up on options....
     
  5. Search the internet stupid. Information is everywhere.
     
  6. My standard answer:
    The CBOE, redoption, and optionscentral websites have a lot of info. Also you can download thinkorswim software and use their Analyze page to graph out various scenarios. Natenberg and McMillian are a couple must reads.
    My advice is for you not to trade options until you are equipped and prepared to do so.
    Two choices if you must trade options: learn everything about them over the next couple years before putting any significant money in them, or end up eventually losing your money to the pros.
     
  7. That's really uncalled for. I know six-year-olds with better manners.

    It's a perfectly legitimate request for precisely the reason you yourself state.
     
  8. Here is what you need to know, if all you do is go long calls or puts.

    1) They can move a lot in relation to the underlying.

    2) They lose time value.

    You want to buy a call at the beginning of a large upward move in the underlying asset. For example you could have bought the NDX 1900 call this morning for $400 and sold it a few hours later for $900. Unless the NDX opens on Friday 4/18 above 1900 that option will expire worthless.
     
  9. You can check the option table to see how much the option price changes relative to the change in price, for a 12.82$ value I believe it would be around $1.5 for $3 increased or better. For options, you typically want to buy at least 3 months away or more, the longer the cheaper but it will be harder to predict. As time value expires the intrinsic value will go to zero, so you'd want to sell the option 1 month before expiration date. Besides time value, there are earning report and news... that could also affect the option prices; so it's good to sell the option early while you can, don't hold on untill the end. Some last notes, read the news everyday so you'll know if the stock is up for sale; you'd have to get out right away or it might go to zeroand stay away from market beween dec to feb, it's slow.

    Good trading.

    sg20
     
  10. What option table??
     
  11. What do you advertise on ET ?
     
  12. The easy way is to download a free P/L tool such as <a href="http://www.samoasky.com/">www.samoasky.com/</a> and play with it a bit.

    To really understand it better here is some info I posted in another thread:
    ------------------------------------------------

    To really understand what will happen to an option you really need to understand all of the Greeks (of which Delta and Theta are the two most important):

    Delta: This is the amount the options price will move as the underlying price moves UP. The value will always be a number between 1 and -1. A positive value means the option will move up as the underlying moves up and a negative number means the option will go down as the underlying moves up.

    Theta: Is the measure of time decay. This is the amount the option will lose per day as the option gets closer to expiration. Things that affect Theta include: Time to expiration and how far in or out of the money the option is.

    Gamma: Is basically the rate of acceleration in Delta. In other words it measures how much the Delta of an option will increase or decrease based on a $1 move in the underlying.

    Vega: Is the amount the options price will change in theory as the implied volatility changes. The change from Vega only usually applies to the time value of the option which in combination with Theta controls the time value of the option.

    Ro: This little guy isn't too important but I will mention it for the sake of completeness. Ro is a measure of how much the options value will change based on a 1% change in interest rates.
    -------------------------------------------------

    How can this all be used? In the other thread someone provided the following example:

    My response was:
    This does not even take into account Vega or what the volatility is doing.
     
  13. Maverick's. I think you multiplied Theta by the change in price and then subtracted that from the option price.

    Theta doesn't move like that. The time decay from theta would only be .05
     
  14. Yes it was late and I didn't double check myself. Here are the correct numbers:

     
  15. No it’s a ridiculous request! Anyone seriously responding here is taken for a ride by Mr. “ET Sponsor”! [​IMG]