The question that I was answering to the other poster was, what should I do now that expiration is basically around the corner and I'm trying to maximize my gain. With expiration fast approaching and sitting under or near the strike price then yes the time premium will come crashing down.
As I had in the post on the other thread, if one is buying far out, say March then that is a different situation entirely. You can buy at or even out of the money and "capture" the time premium. You in essence take money from the House (when things go your way). This is where the added leverage comes in. This is why I say if you are really sure that the stock will move over the next five months and want to maximize your ROI then at or slightly out of the money is a good way to go.
I picked up calls for OCT 30 and MAR 30 calls in VVUS when the stock was going for about $26. I stated that I expected it to double by March to $52 or maybe more and probably even split. I said that the numbers just looked too good on the issue and I felt it would go.
Now with the stock at $26 I could have brought deep in the money calls at $20 for both OCT and MAR. But because I felt VVUS would go, and because it has, I have captured the time premium. Dollar for dollar I am much better off (have a higher return - have not tried to figure it but estimate it at 25-30% additional ROI) because I went $4 out of the money rather than $6 in the money.
The Delta that existed between the OCT 20 and OCT 30 now that VVUS sits at 40 and my OCT 30 is deep in the money is all mine. The person who brought OCT 20 would not have that captured delta but that is up to them. If that means they can sleep better at night and don't get an ulcer then that is a good thing.
Of course, one can go deeper in the money if it fits the risk reward ratio of the individual investor. Some on the other hand would say: Brian, you chicken, you should have brought MAR 40
Too try and wrap this up as I have rambled too long - it all depends on where the individual investor chooses to draw the line based on their own risk preference. I simply think that it is better to look at risk in situational dependence terms. If your modus operendi stays the same then you are not tailoring, not taking advantage of information and research ( like a pitcher whose only pitch is a fastball, if he develops a curve, a slider and so on he becomes more versatile). If you are dealing with a stock that you like but you are maybe 50% sure that things will go the way you figure then I can see the deep in the money. On the other hand, if you are say 80% confident of what you think will happen then why not take the more aggressive stance. You deserve to potentialy garner the full measure of profit for your time and research.
Okay you probably think I'm crazy again now<ggg>. |
