Which price underlying to buy?

Discussion in 'Options' started by jackfrost, Dec 15, 2003.

  1. jackfrost


    I very rarely trade options so please excuse this question if it is dumb or covered elsewhere.
    I have no trouble picking stock turns. I want to get leverage out of it though – therefore I am leaning towards options. I never seem to know which option to buy and at what underlying price
    Here’s my question
    If I like a particular stock – lets call it XYZ and I am looking to go long and it currently trades for $7.70
    I see that the cost of the June 04 $7.50 Call is 1.70c and the cost of the $10.00 Call is .90c
    (If the stock gets to $10 it will be at an all time high – let me know if that really has any bearing and if it would change your choice)
    Which am I better off trading? The $7.50 for $1.70c or the $10 for .90c ?
    Thanks in advance
  2. ktm


    What is your expectation of the price action between now and expiration?

    Is this a high quality stock that you wouldn't mind owning at a much lower price or one that you have performed a modicum of research upon?

    How much is the $7.50 Jan 04 Put?
  3. Assuming there's no significant volatility skew between the two strikes, there are a couple general rules of thumb that you can use to help pick the best strike. The lower strike call will typically offer a higher probability of profit with a lower break-even, while the higher strike call will provide greater leverage and a superior ROI. With regard to which has the greatest expected return, that depends on how good you are with timing and projecting price targets.

    Also, changes in volatility will effect the options differently. So a volatility outlook should be considered when evaluating which option to buy.

    But assuming no change in vol, and assuming you're spot on and the target is reached before theta really kicks in, the 10c would likely be the better buy.

    Again, these are just rough rules of thumb, so I'd suggest you plug the contemplated positions into some software to see the what-ifs in detail.
  4. Also check out delta. Delta basically measures how much the option will change in price with a one point change in the stock price.

    They don't really have a number for it, but divide delta by the premium for the stock and you basically have your ROI if the stock moves $1.

    So, if you are expecting a move that will at least get near to $10, then take the option with the highest Delta.

    This is a very very simple way of looking at it, but it should suffice for your purposes.

    Any htoughts by others on this method?

  5. ==============


    [1] Since its a bull market all time highs are generally good;
    Extremely IMPORTANT, check , double check timing on either call, would study it much & again.

    [2]Assuming timing is right on both calls , which may or may not be true;
    might buy both stock option index calls , & keep notes of some puts also.

    [3]Compare option trading/investing to deer or kangeroo hunting;
    the near the money option [$7.5 call - $1.7]is offering a better target; like a kangeroo near ones arrow is easier to hit.

    [3b] Probably buy both index calls occasionaly ;
    $10 call - . 90 generally has better leverage & faster % increase but more difficult to hit .


    Love learning- Solomon, trader king.
  6. If in doubt, trade the highest gamma(greatest leverage), which is the atm option, in this case, the $7.50 call. Yes, the theta(decay) is also greatest in the atm options, but strictly in terms of leverage, it's the best bet.

  7. Jackfrost ;
    Wanted to remind you & me also;
    in addition to that$ 7.50 call in a bull market actually both mentioned were stock option indexes.

    $2.50 increase in an near the money option index may be lower risk.:cool: If had to pick one yes ,atm like arb said.

    $2.50 increase or decrease in option index isnt much;
    especially $2.50 increase in frost season.:cool: Cool

    Luv learning - Solomon,trader king
  8. Trajan


    Or maybe selling a March, April or June 5 put against buying th June 10 call? I would be more interested in buying the 10c and selling a 5p. It seems like the breakout point for the stock is close to the breakeven point for the 7c. As people have said, the return will be greater on the 10 if it reaches that point than on the 7, esepciallty if you sell a 5p.