Simple question by options novice
- Thread starter Daal
- Start date
It is almost never better to buy calls in a long term situation. If their expiration is too far in the future, your delta (i.e. the amount of money you make for each dollar move in the underlying) will be very small. If the expiration is too short, you'll get killed in theta (the amount of money that is lost every day simply by owning the option).
In short, the longer term your options plays are, the more precise you have to be about:
1) How fast will the stock price rise
2) How far will the stock price rise
3) Will there be any earnings or possible acquisitions which could eliminate volatility?
If you buy stock, you simply have to answer the question, "Up or down" and you can ignore "how soon" and "with what volatility".
In short, the longer term your options plays are, the more precise you have to be about:
1) How fast will the stock price rise
2) How far will the stock price rise
3) Will there be any earnings or possible acquisitions which could eliminate volatility?
If you buy stock, you simply have to answer the question, "Up or down" and you can ignore "how soon" and "with what volatility".
Not entirely correct. Delta is not smaller the more out in time you go.
Most stocks have options that expire 2 years into the future so 6 months is not a really large amount of time. You can choose a deep ITM options to get a delta pretty close to 1 and control 100 shares of stock for a fraction of the price for a very small time value prmeium.
For example, you could buy 100 shares of AAPL now for $93.24 or $9,324 or buy a JAN2008 $60 Call for $36.60 or $3,660. The Call has an effective purchase price of $96.60 or about $3.40 or so in time value premium for 9 months.
The JAN call has a delta of about .94 so you almost get 1:1 and that will increase the more ITM it gets.
So you can basically take a long-term bullish position in 100 shares of stock of AAPL for about 1/3 the cost. The calls will not make exactly as much on the upside due to the small time value premium but you have much less at risk to begin with so it is a trade-off.
If AAPL is at $150 at expiration, the stock makes $56.76 and the LEAP Call makes $53.40 but on much less capital at risk. So you can certainly take on a long-term bullish position in a stock using options with less capital at risk and put the remaining capital in a safe interest earning investment or in other stocks to diversify.
Most stocks have options that expire 2 years into the future so 6 months is not a really large amount of time. You can choose a deep ITM options to get a delta pretty close to 1 and control 100 shares of stock for a fraction of the price for a very small time value prmeium.
For example, you could buy 100 shares of AAPL now for $93.24 or $9,324 or buy a JAN2008 $60 Call for $36.60 or $3,660. The Call has an effective purchase price of $96.60 or about $3.40 or so in time value premium for 9 months.
The JAN call has a delta of about .94 so you almost get 1:1 and that will increase the more ITM it gets.
So you can basically take a long-term bullish position in 100 shares of stock of AAPL for about 1/3 the cost. The calls will not make exactly as much on the upside due to the small time value premium but you have much less at risk to begin with so it is a trade-off.
If AAPL is at $150 at expiration, the stock makes $56.76 and the LEAP Call makes $53.40 but on much less capital at risk. So you can certainly take on a long-term bullish position in a stock using options with less capital at risk and put the remaining capital in a safe interest earning investment or in other stocks to diversify.
Are you sure?
SLAB 22.5 calls with an IV of 27.5%.
Apr: 1.0
May: .9996
Oct: .9695
If the OP is interested in very ITM option buys, Lenny Dykstra (the ex-baseball player) writes a column for TheStreet.com about his portfolio doing exactly this.
This guy:
http://adamsoptions.blogspot.com/search?q=dykstra
has some negative feelings about Dykstra's approach.
Speaking of "Nails" Dykstra, looks like he got thrown out trying to steal second! 
He's averaged down in AMGN with 80 calls totaling about $58K. Keeps loading up on the July 55s, as AMGN steadily dives week after week.
I think they are around $4.30 now and his average is about $7.30. So he's down about $24K.
And since his game is to always go $1 above his average basis, he's gotta get $8 for them. He might get it, you never know...otherwise goodbye $58K!
Lenny, Lenny, Lenny, you do know that it's going to take quite a few $1K winners to get back that averaged down disaster, don't you?
Crazy guy, ol' Nails...
He's averaged down in AMGN with 80 calls totaling about $58K. Keeps loading up on the July 55s, as AMGN steadily dives week after week.
I think they are around $4.30 now and his average is about $7.30. So he's down about $24K.
And since his game is to always go $1 above his average basis, he's gotta get $8 for them. He might get it, you never know...otherwise goodbye $58K!
Lenny, Lenny, Lenny, you do know that it's going to take quite a few $1K winners to get back that averaged down disaster, don't you?
Crazy guy, ol' Nails...
You did not define your statement. naturally deep ITM options delta approaches 1.0 as time value erodes. But this is not relevant to the original question since the person was referring to taking on a long-term position. A delta of .96 ifor a long-term positions s still fine given the smaller risk in using the deep ITM call versus buying the stock.
And you are not going to get much credibility in an options discussion quoting or referring to Lenny Dykstra as a source of expertise LOL
And you are not going to get much credibility in an options discussion quoting or referring to Lenny Dykstra as a source of expertise LOL
I said nothing of the sort. I even cited a web site that thinks his method is crap.
Dykstra has rambled at length about why he is buying deep ITM calls rather than stock. Whether you agree with his picks or not, his reasoning for trading options versus buying stock is parallel to yours. Perhaps the OP might benefit from reading such material.
Small detail but only roughly 40% of equity options offer LEAPS.
As for the delta versus time thing, it depends on whether the calls are ITM or OTM. The delta of OTM calls (and just slighlty ITM calls) increase with time. The delta of calls just OTM and higher decreases with time... and obviously, vice versa for puts Couldn't begin to tell you why but that's been my observation.
As for the delta versus time thing, it depends on whether the calls are ITM or OTM. The delta of OTM calls (and just slighlty ITM calls) increase with time. The delta of calls just OTM and higher decreases with time... and obviously, vice versa for puts Couldn't begin to tell you why but that's been my observation.
My point was this:
You can get a delta of .99 buying a SLAB Apr 25 call for $580.
To get the same delta, you'd have to buy a Oct 17.5 call for $1390.
For 2.5x the cash outlay, you get the same delta. It might be worthwhile buying a nearer month and rolling. Youd' have less capital tied up, you'd get the same amount of profit if you're right, and if something "really bad" happens, you'd lose less money.
You have to pay commissions, and the bid/ask spread, but it's at least worth looking into.