More option lessons for you (a refresher):
1. DON'T TRY TO TRADE OPTIONS SHORT TERM! The difference between bid/ask is anywhere between 10 and 20%, so the option has to go up as much as 20%-30% in value for you to break even after commissions. Buy options for a medium term investment (i.e. a month or more), or when you expect some specific event to dramatically move the stock.
2. The smaller the stock move that you are looking for, the more likely it is that you should be buying the stock, or a deep in the money call. If the stock goes from 25 to 26, a Feb. 17.5 will go up almost a whole point as well. A Feb. 22.5 will go up less, probably 3/4 of a point. A Feb. 25 may move 2/3 of a point. A Feb. 30 may only move 1/8 of a point, which won't even cover the difference between bid/ask.
3. Only buy out of the money calls (i.e. Feb. 30's) if you are expecting a BIG move, i.e. at least 5-10 points, and you are confident that you also know WHEN the move will happen. Someday you will buy and option, and the stock will move up, but not until the week after your options expire worthless.
4. Never buy options the day of or the day after a big move - instead sell them to suckers. Part of the option price is based on uncertainty, i.e. volitility. After a big move, the volitility premium goes up. Thus the next day if the stock price stays the same, the option value will fall due to decreased volitility. If you have to buy something during a big up move, buy the stock. If you have something you want to sell, sell the options. Or sell the options and buy stock.
5. When you are ahead (as you are now), take some money off the table. Sell some of the lower strike price options that you own.
Good luck,
Carl |
