calculating maximum profit potential of a long term option trade

T

trc4949

I am trying to figure out which strike price level delivers maximum profit and leverage from a given assumed move in a stock.

For example, lets say a stock is trading currently at 100 ( A significant peak that occurred many years ago ) and it is likely to make an extended move to 200 over a period of 2 years.

Obviously the call option prices will get much cheaper the further you go out in price (ie. 140, 150, 160 etc.)

So the key seems to be to find the strike price that is the 'cheapest' with the best chance of being substantially exceeded within a leap option time frame (1.5 years or so).

Am I thinking this through correctly ? How would you guys strategize such a trade?
 
trc4949 said:
I am trying to figure out which strike price level delivers maximum profit and leverage from a given assumed move in a stock.

For example, lets say a stock is trading currently at 100 ( A significant peak that occurred many years ago ) and it is likely to make an extended move to 200 over a period of 2 years.

Obviously the call option prices will get much cheaper the further you go out in price (ie. 140, 150, 160 etc.)

So the key seems to be to find the strike price that is the 'cheapest' with the best chance of being substantially exceeded within a leap option time frame (1.5 years or so).

Am I thinking this through correctly ? How would you guys strategize such a trade?
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Every once in a while I pick up some LEAPS and I look for OTM with miniscual theta and a heavy OI (liquid) with tight b/a spread. Can be tough to find, but occasionally there.
 
Based on your views of the underlying buying the 150.00 calls expiring on Jan19, 2018 would most likely provide the most bang-for-your-buck and leave some room for error on your $200.00 target.

Example:
  • AAPL at $97.72.
  • AAPL Jan19, 2018 calls at $1.36 (bid).
  • If the target of $200.00 is reached the calls will be $50.00.




:)
 
Thanks for all the feedback.

The profit potential is astounding if you can catch an ETF during the final blow off phase of a price run.

For example. Assume that the price of silver back in the 70's was an ETF that was optionable.

The break out price was near 5. It went on to 50 within a couple years.

If one had bought call options near the 10 dollar strike or 100% above the current trading price they would probably be near $40 per contract.

So then the price went to 50. So that is 40 dollars in the money. This comes out to 9900% profit potential or 99x your initial investment. Of course this assumes that you sell at the final high and that you are not too early in initiating the trade.
 
newwurldmn said:
Finding the cheapest in your example is easy. Finding the "best chance" requires a return distribution.
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That! :thumbsup: +1

But for me, figuring out what the stock price will be in 2 years is extremely hard. If I know, do what Guru just demonstrated can easily find the max return:

Profit % = (200-option strike)/option prices at each strike, pick the max % gain and you are done.

How do you predict the stock price in 2 years? Can you share your thoughts here?
 
Investing by looking at the rearview mirror is easy. Predicting the future is quite different. For all my investing models to date, backtesting always worked, going live, almost never.
trc4949 said:
Thanks for all the feedback.

The profit potential is astounding if you can catch an ETF during the final blow off phase of a price run.

For example. Assume that the price of silver back in the 70's was an ETF that was optionable.

The break out price was near 5. It went on to 50 within a couple years.

If one had bought call options near the 10 dollar strike or 100% above the current trading price they would probably be near $40 per contract.

So then the price went to 50. So that is 40 dollars in the money. This comes out to 9900% profit potential or 99x your initial investment. Of course this assumes that you sell at the final high and that you are not too early in initiating the trade.
More...
 
ironchef said:
How do you predict the stock price in 2 years? Can you share your thoughts here?
More...


Predicting a particular stocks price in 2 years is pretty close to impossible.

I am not looking to predict any individual stock price. I think I have a much better shot at predicting a macro ETF such as gold or silver.

All one needs to do is find a large pattern and then trade off of it. For example a cup and handle or a inverse H and S pattern on a very large scale.

When price breaks from these very large patterns they make very large moves, but in slow motion....
 
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