OT, options If I had $90,000 to invest, I could buy 10 options (or control the movement of 1000 shares <150 strike price - dec. expiration>). But if I bought the common, I would own less then 500 shares.
10 Dec150 calls are not the same as controlling the movement of 1000 shares. It is important to look at the delta--right now that is around .78, so you would have the movement of 780 shares. Actually, you could buy ten Dec150 calls for 81K as of close Friday. Contrast that with buying 414 shares at ~196 for the same 81K. So you can have a delta of 414 with the common, or 780 with the calls. Where do the calls have to go--at expiry--to be a better deal? You can figure this out by drawing a P/L graph of the options position and superimposing it on the P/L graph of the common. The crossover point looks to be around 248. In other words, in a hold-to-expiry scenario, a buyer of calls is betting that the stock will be above 248 (a new 52-week high). Otherwise, common is better on an absolute basis.
I think it is prudent to factor in a risk premium for the calls (considering you can lose ALL your money on them--something much less likely to happen with unmargined common). Let's say it isn't worth buying calls unless you think the calls will outperform common by a factor of 2. In other words, you are compensating for your greater risk with an anticipation of greater reward. What is the price at expiry where you would do 100% better in calls than stock? $390 by December expiry. That's the price you'd need to reach in order to do twice as well in options as in common (and it doesn't even factor in the fact that you would have a STCG realized this year since the contract expires this year).
That is just one way to look at it. You can lower the target price by setting a lower risk premium for the options, or you can look at other target dates besides expiry. But in any case, the options are not at delta-1 right now, and won't be until they are much further in the money. OTOH, if the stock goes down from here, the delta on the calls will decline, and time will become your enemy.
Nowadays, I prefer to buy common and save the call buying for extremely oversold situations. SDLI in the low 100s would be a point at which I might trade some common for calls.
All JMHO |
