Hello Mr. Wolfinger,
First thank you very much for sharing your knowledge with us. The information you provide is great and we now look at options as another way to invest.
You are very welcome. As an aside, if you like the way I reply to questions, you should enjoy my Rookie's Guide to Options.
Back on 5/6 we bought 1 TBSI Jun08 50.00 Call $3.40 today it is $12.90. Nice trade! The stock at the time I'm writing this the stock is at $61.18. So if I add the 50 plus the price it equals $62.90 which is only $1.78 above current market. But if I buy a Jun08 60 Call it cost $5.30, does this mean the stock has to hit $65.30 before I see a gain correct? No. Let me take this one step at a time (below)
It would seem that I'm better off buying an additional Jun50 Call for $12.90 instead of the Jun60 Call for $5.30 am I correct or I'm trying to compare apple and oranges? In either case I plan to exercise the shares. We already have 700 shares with an avg price of $42.97 and also 5 Jun08 45 Puts that we sold for $3 and are worth $0.50. Thank you.
stock continues to rally, sure it's better to buy the Jun 50 call. You
are paying less time premium. But what if the stock drops to 50?
You'd lose much more by buying the more expensive call.
The June 50 call has 'only' 1.78 of time premium remaining. If you sell
the call now, you get to keep that time premium. If you wait until
expiration and then exercise your call (DO NOT exercise before
expiration unless there is a dividend to collect), you will get to buy
the shares at 50 (good), but you will lose that $178 of time premium
(bad). Is that what you want to do? I am not telling you that it's a
bad idea, I'm just asking if you want to hold this position for another
five weeks, knowing that if the stock doesn't move higher, you lose the
time premium? Are you certain you want to own more shares and not
just take a trading profit in the June 50 call? Are all your eggs in
this one basket? Are you diversified (I don't need the answer, it's a
question for you to consider.)
There are reasons why investors buy (or sell) deeper in the money
options, such as the Jun 50, or options that are nearer the current
strike price, or even out of the money options. You are not exactly
comparing options to oranges, but as I said, there are different
reasons for for buying or selling specific options.
As to the Jun 60 call, the stock would have to rise to 65.30 before you
see a profit ONLY (repeat ONLY) if you hold the option all the way
until it expires. That is usally a poor strategy. If you do that on a
consistent basis, you are not getting the maximum advantage from using
options. When you pay a bunch of cash for time premium, it's advisable
to collect some time premum when you sell your options. Thus, selling
before expiration is a better approach. For example, if the stock
rises $2 over the next couple of days, the option wouild rise by $1.20
or so. That's not a bad profit for an investment of $530. Would you
ever consider seliing, or is buying options the way you 'invest' in
stock? It's not an efficient way to invest, unless you lack the cash
to buy the shares now.
Have you considered two separate investment srategies? One for options
and one for stocks? Buy and hold is a losing proposition for option
owners. Buy and sell is much better. And to me, sell, then buy (as
you did with the puts) is better yet.
Here's one thinbg I don't get: You sold 5 puts, demonstrating a
willingness to buy 500 shares at 45, but you bought only one call and
anticipate buying only one call again. Are you aware that a plunge in
the stock price will be costly? The 700 shares you owns plus the 5
puts you sold?
I have two suggestions for you. these are general suggestions not
meant to be specific to this trade:
don't know who your broker is, but the commissions most brokers charge
to trade a one-lot of options is very expensive. Isn't too much
potential profit consumed by trading one-lots?
2) In general, I advise against holding options you sold until
expiration. At some point, the risk outweighs the possible reward.
I'm not saying 50 cents is the right price to pay for those Jun 45
puts. But there is some price at which you should buy them in. Is
that price 25 cents? Ten cents? Your decision. Should you buy it in
next week, or wait longer? Your decision. Buy I believe in having a
general plan for covering cheap options. It's just not worth the risk
to claim the last few nickels on the trade.
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options