Hi JC: I'll have a shot at this, but realize I really don't know much about options trading, other than the fundamentals.
IMO, the simplest (low maintenance) thing to do would be to buy some July, 2001 calls (there are no options in June). The only question to answer is how many and what strike-price. Suppose that at expiration in June, the stock hits $53 (double todays close) and takes some meandering path there. But all you care about is the price at expiration.
If you bought 10x$30 contracts today, you'd pay $6250 now, and then you could sell the contract just before expiration, and pocket roughly $23,000 ($53-$30)*1000, giving a net profit of $16,750. Or you could exercise the call, plunk down $30,000 ($30*1000 shares), and end up pretty much where you would have been if you just bought the stock outright now, and it went the same route, except that you also spent the call premium. But 'your downside risk is limited' with calls, i.e. the worst they can go to is $0 i.e. expire worthless (and they often do), whereas if you buy 1000 shares, and it drops to below $20, then you'll lose more (on paper).
Where options are dangerous is they give you leverage. Say I have $30,000 to spend, so I could (a) buy 1000 shares (or there abouts), or (b) buy 50 <edit: in the first pass I mistakenly said 5 contracts, duh> call contracts for about the same amount. If the stock ends up at $53 with method (a) you gain $23,000. Method (b), and selling the calls before expiration, your gain would be $23*5000 -$30000 = $85,000. Bigger profit, but bigger risk, your options could expire worthless.
Myself, I buy no more puts or calls than I would be happy to buy stock. It keeps me sane, and limits the loss. As toscano said: when you buy an option, you mentally mark that money as 'lost and gone forever', that helps you keep things in proportion.
All of this is my opinion only, and should not be used as investment advice. If I got anything wrong, I'm sure twister will point it out.
P. |
