When is buying calls better than buying shares?

[taowave]

I think he is simply saying to buy write the Jan 2.5....

Yes,you are capping the upside,but your breakeven is apx 50% lower...

I wouldnt do it,but Its not a bad trade ....

You seem to be confused with the concept of buying stock and selling a 2 year call against it..

What makes you think if the stock pops,you are basically stuck with the shares for 2 years??

Just trade out of it at a sweeeet profit

Man you're saying buy $500 worth and then sell as many calls as I can and then buy more shares with the profits?

So I'd have 446 shares for $500, then I'd sell 4 calls ($224) then I'd buy another 200 shares? Yet my original 400 would be limited to $2.50 maximum price, but the other 200 would be fine because they're not bound by exercising?

Or are you saying buy 446, sell 4 calls, buy 200 shares, sell 2 more calls, buy 100 more shares, sell 1 more call? That sounds awesome.

But if price goes far I'd be limiting my gains AND if price gains I'm basically stuck with these shares for 2 years.

 

[xandman]

Notice the instrument: MNMD small cap biotech/weed.

He wants to buy a lotto ticket for a lotto ticket. Probably at incredible cost (in vol).

Already an incredible loser as we speak. The OP doesn't need to learn about options. He needs to learn about Jesus.

 

[Global OptionsTrades]

Let's say I'm bullish on a stock like 2 years from now. While I figure out how much money I'd spend if I were to spend a certain amount on shares or that same amount on options, and then do Think or Swim's calculator to see the profit between now and then, if buying the options becomes more profitable than the shares, does that mean buying the options is better?

So basically this plausibly happens when a stock has been pretty stable for awhile right? Since premiums go decreased then (I think).

Ok for example. Let's say I want to buy MNMD which is currently trading at $1.12. Let's say I have $500. So this would buy me 446 shares.

This means if MNMD goes to $2 I make $392.

If MNMD goes to 4 I make $1,284.

If MNMD goes to 4.65 I make $1,574

But let's say instead I buy Jan 24 $2.50 call options. Currently they are $.56. This means I could buy approximately 8 for the same amount of money. This means my break even is $3.06.

According to ThinkorSwim, if it goes to $4.65 by Jan 24, I will have $1,590.

So does this mean buying options is potentially more profitable (as long as value above some point) on a certain date?

Short answer: yes, buying options is potentially more profitable.

But there are a lot of "if"s in your hypothesis. Asking "if not" might help you to understand your downside.

 

[IronFist]

You seem to be confused with the concept of buying stock and selling a 2 year call against it..

What makes you think if the stock pops,you are basically stuck with the shares for 2 years??

Just trade out of it at a sweeeet profit

The recommendation was to buy MNMD and sell Jan 24 2.50 calls against it.

If I sell covered calls, am I not forced to hold the shares until expiration if price is in the money?

Let's say MNMD goes to 4 and I have 100 shares and a Jan 24 2.50 call. I have locked my gains in at $2.50 per share plus premium. But I'm missing out on a lot of money that I will never get because I have a covered call. So if I want to take those profits, I have to buy back the option (at a big loss) so I'm not really taking any gains at all unless price KEEPS going more after the option is closed.

So I'm stuck holding the shares and option until it expires, or until it goes back under $2.50 and I can buy it back at not a loss.

Or is there a distinct way to close out an ITM covered call? They don't let you take profit early do they?

I realize waiting until it declines under $2.50 might not make it not at a loss... especially if I sold it while share price was $1.00. But you understand what I'm saying right? I'd have to buy it back, and I wouldn't want to do that at a loss, so I'm required to hold the position until expiration unless I can buy the option back without dodging gains.

 

[taowave]

Why would you be forced to hold shares to expiration???

Rounding the numbers for simplicity,Buy stock at 1 and sell the 1/24 2.50 call at .50..

On any given day you can close out the stock,option or both,regardless of what the stock does..

If the stock goes to 4,you make 3 bucks on the stock,and lose at least 1 dollar on the short call as it will be worth 1.50 (parity) or more...

A buy write is the risk equivalant of a short put..You can sell stock and buy your short call back,you can buy the 2.50 put and be in a conversion taking away delta risk..You can aslo place an order to sell stock and buy call as a package..

ITM vs OTM has no bearing on taking a profit or loss early..

You may want to read up a bit as this is pretty basic stuff

 

[IronFist]

So what you are saying is if I buy 100 MNMD for $1.01 and sell 1 24 Jan 2.50 call for $0.53, and then MNMD goes to $1,000 and my profit is locked in at $255, I can close this position and NOT eat a giant loss in the process?

But my profit won't be $255 until 24 Jan. If it happens next week my profit would be a lot less.

When a covered call is ITM, how do you close the position before expiration and not lose profits?

 

[vanzandt]

When is buying calls better than buying shares?

When you know a big upside move is coming.
And it's not reflected in the premium.

 

[taowave]

Grasshopper, A buy write has the same payoff profile as a short put.If you sold a put and the stock rocketed,why couldn't you close out,collect most or alamost all of the premium sold before expiration??

Check your math on max profit

So what you are saying is if I buy 100 MNMD for $1.01 and sell 1 24 Jan 2.50 call for $0.53, and then MNMD goes to $1,000 and my profit is locked in at $255, I can close this position and NOT eat a giant loss in the process?

But my profit won't be $255 until 24 Jan. If it happens next week my profit would be a lot less.

When a covered call is ITM, how do you close the position before expiration and not lose profits?

 

[IronFist]

You're right maybe my math was wrong. According to ThinkOrSwim today, a 0.50 24 January covered call would be $206 if MNMD reached $1,000 on expiration and $201 if it reached it tomorrow... this might not be right, my ToS desktop seems to not show before expiration prices correctly.

Anyway, i was under the impression that closing a covered call position -- buying the call and selling the stock -- BEFORE expiration netted you a loss because the position doesn't reach its full value until expiration.

 

[IronFist]

Will you guys tell me if I'm doing this right?

WHEN IS BUYING A CALL BETTER THAN BUYING SHARES?

This uses today's prices.

MNMD is $1.05 per share.

Let's say you have $118 -- this number is round so you can buy two options.

Your $118 would get you 112 shares.

This means if price is $2.05 you have $112 profit.
If price is $3.05 you have $224 profit.
If price is $4.05 you have $336 profit.
If price is $5.05 you have $448 profit.
If price is $6.05 you have $560 profit

Let's say you use this same $118 and buy 2 $0.50 24 Jan calls for 0.59 each. This costs you $118.

according to think or swim...

If price is $2.05 at expiration you'll have $-118
If price is $3.05 at expiration you'll have $-7.02
If price is $4.05 at expiration you'll have $192.03
If price is $5.05 at expiration you'll have $392.99
If price is $6.05 at expiration you'll have $592.05

While comparing to the numbers above, it looks like after $6.05 you will have more profit with options.

So option are more profitable if you think cost will be above $6.05 on or before expiration.

X axis is stock price on 24 Jan, not sure how to label that on the chart.