Options strategy based on "How sure are you that GOOG will hit $450".
Continuing on the previous options email on GOOG........
Let's consider this trading scenario only for the next 4 to 5 days because
if we consider a longer trading scenario, other factors play in. I am
talking Feb calls in the scenario discussed below.
Say the stock is at $400 when you bought the option of 400 and 410. These
options will have a higher premium than the rest because it is so close to
the money. Now if the stock reached 420, the premium for $400 call will not
be much (because chances of stock reaching 400 becomes low). This means you
are not seeing a dollar to dollar direct increase in your options value wrt
the stock value. At this point (V imp point: you should feel strongly it
will reach 450) the $420 calls will be priced to move. Therefore, sell the
400 calls and buy the 420. That way you maximise your profit potential by
holding an option (though with a higher premium) that will reap you a
greater percentage profit than a 400 call.
An obvious retort to that logic is "if I was so sure that it is going to 450
then I'll buy the 450 call directly". The higher strike price calls are
extremely well priced and secondly you lower the risk by owning lower strike
prices. Post earnings, the premiums will be lower.
No comments:
Post a Comment