Jeffrey:
I'm sorry this post is reaching you too late to take action Friday.
I was locked out of the forum by the policy change. Looks like you
decided to buy the Aug and Oct 125s anyway.
I'll start by repeating that option trading is extremely risky, and
I am in no way recommending it. 6 years ago I doubled my money in
1 month running a bull spread on MSFT. It was one of the worst
months of my life, and I'll never try it again.
You asked about riskiness, but I'm not sure the question makes sense.
The higher the strike price, the less likely the option is to be
valuable, but the lower the premium. Likewise, the longer the time
frame, the fatter the premium. Out-of-the-money options move more
and more sluggishly in response to the stock the higher the strike
price. In the money options move exactly with the stock price.
Thus, the right question to ask is what's the risk/reward. The
"in-the-money" 120s are "safer" from the perspective that they're
still likely to be worth something no matter what on August, but
you're paying the highest premium for them, and the premium is
guaranteed to be worthless by then. In terms of risk/reward, buying
$5 or $10 out of the money offer the best chance for gains over
short periods of time.
Some people seem to buy options thinking they should hold for as
much of the time period as possible while the stock is going up.
The problem with doing so is that the meter's running down your
premium the whole time. The real way to make money in options is
to be in and out of them in a matter of days, before the premium
goes down much, so you pass it on to someone else.
And there's the rub...you have to be spot-on in terms of timing to
make money this way. Most of us aren't that good. My HP-12C tells
me MSFT is worth 140 this year. My intuition from years of following
it is that we'll get a 2:1 split this year. And my crystal ball says
it's a $400 stock in the year 2000. That's good enough for me to buy
it confidently and patiently wait for the profits to roll in.
From the "quick score" point of view buying the 125s was indeed the
best bet, IMHO. If MSFT moves above 125 you'll double your money in
a day. If it rockets to the 130s you'll have an outrageous profit.
However, if it caves in, you'll be cut in half. If you're greedy,
wait for 130s to close the position. If it were me, I'd close it
Monday or Tuesday. You know the rule as well as I, "buy the rumour,
sell the news". There's still an awful lot of negative trends on
the stocks I follow (maybe MSFT will break the downward trend in
techs).
The bull spread is for someone who's less sure of the exact timing,
but has a target price range and a target time frame. It's a slower
way to make money, and perhaps not suited to a market as volatile as
this one. With this strategy, you buy the Aug 125s and simultaneously
sell the Aug 135s. Or, you can wait for a 5 point move upward and
then sell the 135s for a higher premium. Either way, the cash from
the sale helps reduce the net cost of your position. The bear spread
is the same idea done with puts. I would encourage you to read a
book on options before doing any more trading.
Good luck Monday! |
