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Strategies & Market Trends : BAK - Investing
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To: Zoso_17 who wrote (2698)5/16/2012 9:46:59 AM
From: XoFruitCake3 Recommendations   of 3249
 
Re: NE continues to slide

Would I be better off picking up the 40 strike or the 35 strike or maybe even the 42 strike....I really don't know. What do you use to determine the best strike XO?
The way I pick the strike price for an option is going reverse. i.e. once you form you view on the company and why you are bullish. You also set up a target price at the time the option expire e.g. $50 for NE when the Jan 2014 expire, then it become a very easy task to find out which option will give you the best bang for the buck.

Jan 14 30 call +98% = (20/10.1 -1)
Jan 14 35 call +179%
Jan 14 40 call +189%
Jan 14 45 call +109%

So in this case, Jan 14 35 and 40 call will give you the same upside. You would notice that there is a bell curve going. There is a max return point for any price target you set up. So the key is to get the price target as close as you can (i.e. don't be too optimistic nor pessimistic). This will force you to think through all the details of your bullish case (i.e. the type of "it has to go up" reasoning won't work in buying option). I normally won't go in any option trade unless I can see at least +150% to +200% return. But those are for 6 to 9 months options. So you have to decide if 150% to 200% is worth the risk of locking up you money for 20 months + (in the worst case, there are possibility that you meet you objective and cash out early)
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