Strictly Buy and Sell Set Ups Message Board

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Strategies & Market Trends : Strictly Buy and Sell Set Ups

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To: kodiak_bull who wrote (2904)	3/21/2005 6:55:35 PM
From: kodiak_bull	Read Replies (1) of 13449

Editing last paragraph (sorry I typed it too fast): "If I'm trading a commodity such as apples and I can get comfortable paying $300 now for something I feel I have an excellent chance of receiving $500 for in June, do I do the trade? Or do I pay $600 (unilateral calls) now for those apples that have an excellent chance of paying me $500 in June, but only a so-so chance of paying me up to $1000 in June? Do I take the "surer" 66% return, or play for the more risky "minus 17% (-$100) to 66% (+$400)" return? If the plus $400 return (and its -$100 return and all the stages in between are equally likely), then the expected return is only $150 [-100, 0, +100, +200, +300, +400)/6 = $150]. Expected return on a $600 investment with the naked call position you propose is only 25%, versus 66% with a call spread on the apples." Kb

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