Best option strategy for a stock expected to double

C

cunparis

I have a few stocks that I expect to double in price and I'm curious about the best options strategy to take advantage of this.

I would just buy the stocks in question but my funds are limited so I'd like to profit from leverage.

Should I do an outright call? Let's take a specific example: AUY. If I buy a call, what expiration month? What strike price?

I've read about straddles, I'm not concerned about AUY going down although I understand adding a put to the call would give me insurance against it.

How would you trade it? I'm familiar with the basic strategies (I'm really new at this and haven't traded an option before) but I'm not sure how to apply them. Which strategy, and how to determine the strike price, etc.

Any help is gratefully appreciated.
 
Quote from cunparis:

I have a few stocks that I expect to double in price and I'm curious about the best options strategy to take advantage of this.

I would just buy the stocks in question but my funds are limited so I'd like to profit from leverage.

Should I do an outright call? Let's take a specific example: AUY. If I buy a call, what expiration month? What strike price?

I've read about straddles, I'm not concerned about AUY going down although I understand adding a put to the call would give me insurance against it.

How would you trade it? I'm familiar with the basic strategies (I'm really new at this and haven't traded an option before) but I'm not sure how to apply them. Which strategy, and how to determine the strike price, etc.

Any help is gratefully appreciated.
More...

Do you have to decide right away?

Do you have time to learn about options and how they work before placing money on the line?

It's a bad idea to trade options when you really do not understand the most basic concepts.

Sure you can buy calls. But in this environment, most calls carry a very high premium. you may be correct that the stock will rise, but if it doesn't rise enough you may lose your entire investment. Are you prepared for that?

It really pays to learn first, trade later.

Which option to buy? There is no answer. Do you expect the stock to double very soon? Or in one year? The expiration month you choose is vital to your success or failure. No one can pick a month for you.

Are you willing to go 'all in' on your expectation? Are you willing to lose it all if the stock rises, but only by 50% The strike price you choose is crucial. How can anyone tell you what play YOU want to make.

Ordinarily, I'd say but in the money calls, so you pay little time premium, but you have too little cash.

Gambling a small account on an options play is just foolish, but it is your money.

Are you willing to accept a smaller profit, but adopt a method with a much higher chance of earning a profit? Or are you only interested in gaining high leverage to make a killing? If the former appeals to you, consider selling out of the money put spreads.

OK I just took a look at this stock. It's a $4 stock. If you don't have enough money to buy some shares, you don't have enough money to gamble with options.

Options are best used to reduce risk, not to gamble.

Good luck.

Mark
http://blog.mdwoptions.com/options_for_rookies/
 
Quote from cunparis:

Let's take a specific example: AUY. If I buy a call, what expiration month? What strike price?
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What expiration month depends on when you think it will double, this month, next month, six months etc.

Once you have the month, then you can determine the strike based upon expectation calculations.

Please understand it is a lot more complicated then what I am about to write and there is more than 1 way to look at this but I am hoping that you will get the idea. There are many things to consider. I did this quickly using XL.

When I checked, these were the quotes: (I am going to assume that you think AUY will double by Jan 16, 09.

AUY - 4.71
Jan 09 2.50 Call - 2.50
Jan 09 5.00 Call - .95
Jan 09 7.50 Call - .45
Jan 09 9.00 Call - .25

If AUY doubles to 9.42, the intrinsic value of each call would be:
Jan 09 2.50 Call - 6.92
Jan 09 5.00 Call - 4.42
Jan 09 7.50 Call - 1.92
Jan 09 9.00 Call - .42

The multiple of your investment would become:
Jan 09 2.50 Call - 2.77
Jan 09 5.00 Call - 4.65
Jan 09 7.50 Call - 4.27
Jan 09 9.00 Call - 1.68

Again, there are many things to consider but based on the expectation that AUY was going to double by Jan 16, 09, I would be most interested in the Jan 09 5.00 Call.
 
Quote from dagnyt:

Do you have to decide right away?

Do you have time to learn about options and how they work before placing money on the line?

It's a bad idea to trade options when you really do not understand the most basic concepts.
More...

I asked my question so that I can focus on the strategies that are appropriate (many are not) for my situation. No hurry but as the price advances I think the option premiums will advance too.

This is a side bet for me. I mainly swing trade futures and also some long term stocks. I figure buying some options on some stocks that have just bottomed out would be a good bet.
 
Quote from u21c3f6:

Again, there are many things to consider but based on the expectation that AUY was going to double by Jan 16, 09, I would be most interested in the Jan 09 5.00 Call.
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Thank you. I know I sound like a complete idiot who's about to buy options as soon as I get done with this post but that's not the case.

I'm an experienced futures & stock trader I just don't have any experience in options. I'm reading a book on options so I'm going to compare your suggestion with the analysis they use in the book and see if we come to the same conclusion.

Ordinarily I'd just buy the stock but I'm trying to figure out options would be more interesting.

Thanks
 
Quote from cunparis:

I have a few stocks that I expect to double in price and I'm curious about the best options strategy to take advantage of this.

I would just buy the stocks in question but my funds are limited so I'd like to profit from leverage.

Should I do an outright call? Let's take a specific example: AUY. If I buy a call, what expiration month? What strike price?
More...

With options, you need to have a very precise boundary by which point you expect your stock to have gone up by a particular price. This seems to be a very difficult trick for most people to pull off with any sort of consistency.

I won't say "don't do it" -- in fact, there are some such cases where options really can make sense -- but please take into consideration the possibility of your own overconfidence in market timing subtleties (something I confess that I failed to do in many similar "market timing" situations...).
 
Quote from cunparis:


I'm an experienced futures & stock trader I just don't have any experience in options.
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Maybe try single stock futures then?
AUY1C

has pretty pathetic open interest though
 
Quote from Lucky:

Maybe try single stock futures then?
AUY1C

has pretty pathetic open interest though
More...

Didn't know that existed! I've heard of SSF but didn't know they had them for smaller companies.

I'm not concerned about liquidity since this will be a buy and hold. I'll check it out..
 
ssf's at onechicago are a great product i only wish liquidity increase. as for your trading strategy, look at a reversal. sell an OTM put and buy the ATM call. you reduce your expenditure and can still capture all the upside.
 
You could try an out of the money call calendar spread, maybe out a few months. The further out option will increase at a greater rate than the closer to expiry option, making it a cheap source of gamma
 
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