Fuchi, to paraphrase (and simplify a little) Craig's explanation of what you want to do:
If you're thinking about buying calls, you're assuming that the price will be going up. What you have to decide is WHEN you think the price is going to go up, and then make sure you buy calls with an expiration date AFTER the time when you think the "good news" is going to become common knowledge. If, for example, you think that the major factor affecting Cyrix's price will be a fantastically high earnings announcement this week, then you have narrowed your choice of options down to ones that expire after this week.
Second, decide where you think the price is going to go after that announcement. Use this as a (rough) guideline to the strike price you want to choose. "Rough", because I'm assuming that you're pretty certain about when the market will come to its senses but not so certain about "how much" they'll come to their senses, so you want to be a little cautious here in step two.
Once you've decided on those two factors (time and price) use them as guidelines to pick the option that you want. Call options with earlier expirations will be cheaper than those with longer ones (i.e., the price of a Feb 25 contract will be less than the price of a May 25 contract), and options with higher strike prices will be cheaper than options with lower strike prices (because there's a greater probability, for instance, of the future Cyrix price exceeding $25 than of it exceeding $30). So the shorter expiration/higher strike price that you choose, the cheaper each option will be. But again, be caustious, because if you purchase an option with too short a maturity or too high a strike price and the stock doesn't go up in time, you've lost your money.
I know, because I bought some Nov 25 calls thinking that the market had to come to its senses. It didn't (and I wasn't smart enough to sell when the price got up in the $22 range), so I lost all the money I had put into calls.
One final clarification (and, yes, Craig, I'm assuming that he was half-way serious about being option-clueless [ or at least that someone reading this is]): if you do invest in options, what price YOU think Cyrix should be selling really isn't important. What's important is what price you think EVERYONE ELSE will come to believe is appropriate for the stock before your option expires.
Hope this helps.
Troy |
