AAPL JAN 07 calls: 80 vs 90

J

Joel Reymont

Folks,

I see that the JAN APPL 80 calls are 12.80 (Ask) in ToS whereas the 85 are 9 and 90 are 6.

It looks to me that it's cheapest to buy the 80 calls since I would break even above 92 whereas with 85s it would be 94 and 96 with 90s?

Is my understanding correct? How do you explain this pricing?

Thanks, Joel
 
Quote from Joel Reymont:

Folks,

I see that the JAN APPL 80 calls are 12.80 (Ask) in ToS whereas the 85 are 9 and 90 are 6.

It looks to me that it's cheapest to buy the 80 calls since I would break even above 92 whereas with 85s it would be 94 and 96 with 90s?

Is my understanding correct? How do you explain this pricing?

Thanks, Joel
More...

as you go deeper in the money, more of the call premium is in the stock value. but risk is higher per dollar movement, since delta (option price movement per underlying $1.00 price movement) is higher. so a $5.00 drop in apple will hurt you significantly more on a dollar basis. you are achieving less leverage with higher dollar risk per contract. on the other hand, more dollar upside per contract if it goes up.
 
That's the beauty of options, you can really map your sentiment to your strategy. You do have a higher likelihood of break even by buying the 80 calls. You also have a lot more capital at risk should AAPL tank. The flip side, less likely that the 90 call is ITM @ expiration. Cheaper price, higher likelihood that you lose 100% of your premium paid.

Have to match the strategy with your outlook on the underlying (of course, taking into account IV as well)

As far as pricing question goes, are you thinking the options are mispriced or are you asking how options are priced?

Quote from Joel Reymont:

Folks,

I see that the JAN APPL 80 calls are 12.80 (Ask) in ToS whereas the 85 are 9 and 90 are 6.

It looks to me that it's cheapest to buy the 80 calls since I would break even above 92 whereas with 85s it would be 94 and 96 with 90s?

Is my understanding correct? How do you explain this pricing?

Thanks, Joel
More...
 
Quote from Joel Reymont:


Is my understanding correct? How do you explain this pricing?
More...
This is options 101 stuff. Of course the higher strike calls are cheaper (but have a further away break-even point). There are many recommended books on options trading--poke around at the book review section here on ET.

This is one of the classics:
http://www.elitetrader.com/bo/index.cfm?action=view&B_ID=26&CatID=4

Think of it this way--you're risking less money buying a 95 call than an 85 call (one is already in the money, the other is not, so it's cheaper). If AAPL does something stupid and the stock drops to 60, you're out $13 on the 85 call instead of $6.

I don't mean to be harsh, but I'd recommend you find a good book quickly--you're setting yourself up for a world of hurt and surprise with options otherwise. Options are wonderful, but I can list a half dozen ways you can lose money that you would not expect. :-)

My favorite is the (perhaps apocryphal) story about the guy who was long a bunch of GOOG calls right before expiration. He thought they would expire worthless, and so left them open on expiration day. Instead, GOOG rallied right above his strike and he got automatically exercised. In the premarket the following Monday, GOOG dropped 4%. As a result, the options he spent $3k on resulted in him owning 500 GOOG shares at $300. He got a margin call (he suddenly owned $150k worth of stock on a $5k account), and then had to cover his GOOG shares at a big loss. Net result, he lost $6000 on the shares, $3000 on the options, and ended up paying tons of fees and sending his broker an extra $4k to cover his losses. All on a position he thought was a simple expiration.

Anyway, be careful. :-)
 
Quote from spreadn00b:

As far as pricing question goes, are you thinking the options are mispriced or are you asking how options are priced? [/B]
More...

No mispricing, basic options question. I'm a newbie :-).
 
Thank you very much scriabinop23, spreadn00b, FullyArticulate! I just bought a bunch of books and will soon buy more, McMillan and Natenberg included.

Fully: I just sent you an email, would you kindly take a look?
 
Just make sure you plan accordingly. I believe, APPLE reports earnings 2 days before the Jan expiration. So the stock will definitely have a huge move. It always has historically.

In fact FYI, the last earnings report, APPLE was treading $75ish & reported earnings 2 days before the expiration on a Wednesday AH.

On that next day thursday, it opened $4 higher and within the next trading day, friday, the expiration day, just closed pennies below $80, which I found interesting, because there was an absolutely insane amount of open interest at the $80 strike.
 
Well, my obvious bet is that AAPL will make a big move _before_ expiration and earnings as they have MacWorld (their largest yearly expo) in the beginning of January where they will announce new products like iPhone.

I'm a software developer and a voracious reader of tech news so I'm trying to buy the rumor and sell the news here.
 
Quote from Joel Reymont:

Well, my obvious bet is that AAPL will make a big move _before_ expiration and earnings as they have MacWorld (their largest yearly expo) in the beginning of January where they will announce new products like iPhone.

I'm a software developer and a voracious reader of tech news so I'm trying to buy the rumor and sell the news here.
More...

Nice - I figured as much and I didnt mean to state the obvious. My only point was that, you may not want to shoot your whole wad with the position you open now, because calls will be a heck of allot cheaper two days before the expiration/earnings announcement.

However, I completely forgot Macworld is coming up really soon. So you are right & with your strategy, selling on the news, a good one - you really have two opportunities coming up; one before macworld and the other before earnings.

I have actually been watching the call volume on Apple the last week & its been crazy. Between the 90/95/100 strikes there is currently open interest of roughly 170000 contracts in JAN, so many people share your sentiment.

Its just a matter of timing for you. Apple has been consolidating & has taken a little breather here, flirting with support at the $90 mark. What was interesting, is that, when the Nasdaq this week had those two strong days, Apple did not participate in the advance.
 
You are probably aware of "Buy the Rumor, Sell the News"...?!

And with all the open interest, seems like a lot of people are on to the same idea...

Then again, I'm surely not betting against Steve Jobs.
 
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