As I continue to explore options strategies, particularly the ins and outs of spreads, I wanted to get people's opinions on a scenario I'm wondering about:
I've got call options on AGPH pharmaceuticals (Nov 47.5s) that are nicely in the money. To the point where I could sell Nov. 55s for slightly more than I paid for the options, effectively getting my original money out of the investment (well, not with the tax I'd have to pay on the sale of the calls, etc., but you get the picture).
Thus the option spread from 47.5-55 risks none of my original capital - which would seem to be a good thing in a risky investment. I'd pocket a slight credit, and set my breakeven on the investment at 47.5, with a maximum profit of 7.5/call, but if everything expires worthless, I've already pulled my money out.
This looks like a scenario my Dad (a Depression baby) once told me about stocks - you invest, and when/if the price goes up, you sell off the equivalent of your original investment, so you can lose none of your own money in the market. For wisdom from the post-1929 years, that makes sense, and seems wise for options. Anyone care to offer a sophisticated risk/reward scenario for this? Am I really any less exposed to risk by "capping" the purchased call by selling another at higher strike and pulling out my money, than if I continue to hold DIM calls? I'm certainly limiting my upside, so I should be limiting my downside as well...
TIA,
Randy |
