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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe)
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To: browser who wrote (1643)9/18/1999 9:22:00 PM
From: Madpinto  Read Replies (1) of 2241
 
It gets a little more complicated when you bring different months into it. I meant comparing various strategies in the same month. I believe it is best to determine your time horizon first and then compare. For instance, let's say you believed CPU would move to 11 by Jan expiration. You could buy Jan 5, 7.5, or 10. You wouldn't want to buy anything you didn't believe would finish in the money. Assume the prices of the option to be $2.5, 1.25, .625 respectively. First, evaluate buying the options. If you were willing to spend a $1000, you could buy 4 Jan 5's, 8 Jan 7.5's, or 16 Jan 10's. (You should include commissions as you do this, but I want to keep it simple.)

Option.....$ w/CPU @11.........net profit..............total...

Jan 5 .......6...........6 -2.5=3.5.......3.5*4*100= 1400
Jan 7.5.....3.5........3.5 - 1.25= 2.25....2.25*8*100= 1800
Jan 10.......1..........1 - .625= .375.....0.375*16*100= 600

So given the assumption the stock goes to 11, Jan 7.5's would be the best choice. I suggest graphing each option to give you a good picture of breakeven points and potential profit and losses. Then do the same analysis with spreads using the same $1000 number (or whatever amount you choose.)
This is not a recommendation or advice to buy a specific option or follow a particular strategy.
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