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Bush, Dean wrote:
>
> Happy New Year to all of you!
> Before hand, I know that a lot of variables come into play regarding the
> "right" price for purchasing options, but in general would all of you
> recommend buying calls and puts that are (1) slightly out of the money, (2)
> at the money, or (3) slight in the money?
> I feel that I may have made a mistake of buying the wrong call option on
> IBM: I purchased 10 contracts of the IBM Jan 105 on Monday. The price has
> hit 105 every day (including today), but just doesn't seem to want to
> breakout above the 105 mark.
> I thought that on the good news of their upcoming compact hard disk as
> well as upgrade by brokers today that it might close above 105.
> What do you have to say about my move, or IBM in general? Thanks for
> your comments!
> Dean
> Dean Bush
> 7433 Beach Drive
> Panama City Beach, FL 32408
> Phone: (850) 230-DEAN
Two thoughts for two cents...:
1 - The further out of the money you buy, the smaller your potential
loss, and the more likely it is. It all depends on how comfortable you
are trading with low odds. Next, the most important is to bank on the
few winners, so that they pay back for the losers. That is usually
fairly difficult to do.
Best is maybe than to buy more at the money, and hedge your position by
selling out of the money, once you are in the money, ie buy 100 calls
when it trades at 100, and sell 110 or 115 calls once your reach 105.
You may also consider the time issue. If you are confident with your
longer term analysis, ie, the stock should move over 110 in two three
months, you can buy at the money with a longer maturity, and sell out of
the money short term on each new peak, and hold to expiry of the short
term. ie: buy 100 June and sell 110 Jan once it stalls at 105. Hold to
expiry, and with a little luck you may renew with 115 feb and 120 March
and so on...
2 - If your stock is supposed to move up on some piece of news within a
specific time, and it doesn't move up, you get OUT. Or you are not
following your plan. You can always reenter later, but never wait for
the market to present you a bill for being wrong! If you know
beforehand, then use the opportunity to get out at scratch or wherever
it is. If however it does behave correctly, then start plan 2 for
increasing a valid position, and plan 3 for taking profits or stops
following predefined criteria.
Hope this gives you some options (just kidding...)
Happy new year
Gwenn
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