Quote from khaledaya:
i know it is a little strange to ask in public form, but i would like to take pros advice in investing at one time to buy Citi Bank (c) call of Jan2013 strike $7.5 for .40 for a full amount of 25,000.
it could be around 600 contract at once, but since the current price is $5.00 dont you guys think it could move at least to that area in two years time??
I have no issue in waiting that long too!!
any feedback
Yes. Why don't you sell 60 contracts of the Jan 2013 strike $7.5 calls for .40 to receive $2,400 in premium less commissions. Then also sell 60 of the Jan 2013 strike $2.5 puts. Hold both to expiry unless one leg looks like going ATM/ITM, in which case get flat. Come back after the Jan 2013 exp and tell us how much you made. If you made a profit, it will be at the expense of numpty DOTM option buyers and you will learn a valuable lesson about market participants.
If you make a loss, it will likely be less than what you would have lost betting $25k on one OTM call. If you would have made a profit on your OTM call, you will find that you would have been more profitable buying $25k of C at the market Monday morning and not messing about with options at all.
In the unlikely event that C goes to $50 in 2 years, you should then realise that even though your wildly leveraged bet would have paid off, you likely wouldn't have had the experience or the stones to hold it going $40 ITM.
More work required.
Finally, what you propose doing is not "investing". It is trading, or if you prefer, "gambling". An investor invests in investments. An investment is an asset which produces an income (rent, interest, share of profits, royalties, etc). A long option position does not entitle you to income. It is a wasting asset which will expire worthless at a set time in the future, unless the underlying is within a defined range. It behaves more like an insurance policy than an investment. What you are buying is insurance against C going up. If you are not spot on in your reading of the underlying, you will end up losing 100% of your "investment". If you are bullish on C, buy C. You will own part of the company, have an entitlement to receive dividends, and if the stock is unchanged after 2 years (very common), then you have lost opportunity cost only instead of your entire investment.
How about you do some research. Find a stock scanner. Select the most recent five non overlapping two year periods. This gives you 10 years - includes both bull and bear markets. Select a universe of stocks. Determine how many of them were changed less than 10% from the initial closing price and the closing price exactly two years later. Then look at historical option quotes for the initial closing price day. How much volatility was "priced in". How did the DOTM put/call buyers fare?
Then learn the correct place to use options. I'd be interested in your honest answer of why you are using calls rather than just buying C to express your bullish sentiment? I'd bet it is one of the following:
1) "Limited Risk" (well so is buying $25k worth of C - it can only go to zero)
2) "Unlimited gains" (same as owning the underlying)
3) Lottery type returns on a puny 25k in the unlikely event the company doubles in value 10 times in two years. (what does this have in common with reckless gambling?)
What about the total and complete loss of your entire investment if the stock goes up "only" to $7.40, or is unchanged, or declines 2% in the next two years?
