Yes, I have found that the option will move more inline with the stock price (greater delta) the less time premium it has. Of course, IMO this can work the other way too. The greater the difference the time between now and the expiration date, the more that can happen to the price of the stock. So under some circumstances, the options can move up ahead of the price movement of the stock and in cases even yield options more than one month out substantially more expensive than options expiring the current month. However, the price movement of the stock IMO is best reflected in the option with which expires the current month.
One example is with split announcements on stock that has been in a uptrend. In this example, the option price on the current month will increaase substantially with respect to the recent price action of the stock. In other words, implied volitility increases substantially from the underlying actual volitility of the stock. But since I am gauging my option profits on the underlying price movement of the stock on the price movement of the option itself, I am not concerned with this type of price gain with from option.
Smart that you waited for the stock to drop some more before purchasing the option. Timing is very important with short term option trades. It may drop more before continuing up. This in part depends on the market tomarrow. The downward movement of the stock late today was expected. Since this occurs before the resistance point at 60 3/4, there is more room for the price to move down. This is a little on the late side for moving into the Sept 60 option, but I still think it will work out. For that matter, I did not expect the stock to continue its move up past its initial morning gain. You will have to closely watch this stock over rest of the week. I do not see the price moving lower than 57.75 in the interim, and the volitility is curently in your favor. Looking at the chart on quote.com, it looks like 58 3/4 may be the intermin low for this stock. Tomarow should be interesting for both of us.
PSFT never seeing the prior days close is true on a breakout type of run such as this. But a breakout run can terminate as quickly as it began. So IMO you need to be careful here. However,with the improving technicals of this stock, the picture is shaping up for PSFT.
One of the ideas here is not to let the item premium work against you. So unless the stock has well-establish upwward momentum, buying an option more than one month out is IMO not worth it. You can make just as much or more money by a correctly purchased option with one month or less from expiration, and end up risking less in money. Still, I would not buy an option with anything less than about 2 or 2.5 weeks left before expiration.
You see, I am purchasing the option with the goal in mind to convert into stock. This dictates alot of my approach. I may end up trading off on the option, but that is not my goal here. So in this approach, the time premium on the option will work against me. I also find this more conservative approach to give me a buffer which helps in getting myself out of unpredictable situations by trading the option to break even. Now if the stock continues up to establish an uptrend, I will just ride the stock up to the point where I will convert the option into shares of stock.
If I was strictly interested in the short term trading aspect of options, I would be more inclined to purchase an option with a longer timer expiration to it. Still, you have to be careful here since the time premium even for the option with the next expiration date out can carry a very costly time premium due to the expectations of the option traders. Since you are dealing with an instrument that costs in the few dollar range, options do not have to cost that much more in order to be selling at a substantial premium over what one would expect for the given expiration date of the option. I have seen this many times where one more month out can make the different of 50% or more in the cost of the option and end up costing me for example over $1200 instead of the $750 or less I normally place into a particular option purchase. Remember that part of sucessful option plays is risk management which in part takes place through money management. My choice between the alternatives would still come down to a risk analysis based on the pricing structure of the options chain for the stock, and the stock's S&R levels. Also the momentum the stock has established also would impact the outcome of my choice.
Right now, this is a breakout play and not a momenum play on a stock. So I purchase the option as a short term play with the least time premium which IMO also has the greatest liklihood of following the price of the stock. It will be interesting to see what you find in the options book on this. I have not looked at it in awhile and am going by my previous short but successful experience with this type of option trade. And timing is very important with trading on breakouts, and breakouts are much more risky to trade on than stock with established momentum.
Bob Graham |
