Dean- Actually, the calculations I made today were using the prices shortly before the closing of the options market. The closing prices were slightly higher.
The bottom line for call options is to find the lowest premium, and an out-of-the-money strike price (and 10 may be in-the-money tomorrow).
For example, when I bought the March 10 calls, the price was 3/16 (less than 22 cents with commission). The stock price was between $7-8. As NM's price approached the strike price of $10, my calls became a bit more valuable. The real payoff comes when the option becomes in-the-money, when NM moves higher than 10, because for every dollar the stock rises after 10, the option increases value by about 4-5 times. This is true only because 4-5 calls cost me one dollar; if I had paid .50 for each call, I could buy only 2 for a dollar, and for every point NM rises above 10, the option would increase value by only 2 times.
When NM goes to $11, the March 10 may be worth $2.00.
If NM reaches $15, the March 10 will likely be worth $6.
If NM gets to $20 (that'd be nice), the call could be worth $11.
So generally, when an option is in-the-money, its value increases a dollar for each dollar of the stock.
In the above scenario, if I could sell the options at the price I listed, not including commissions, this is how much of a return I would have:
NM=$11: value of option=$2, cost=.22. Return=9-1 (800% return)
NM=$15: value of option=$6, return=27-1 (2600%)
NM=$20: value of option=$11, return=50-1 (4900%)
That's why it's so profitable. But not so, if I were to buy an option with a $1 premium. If the premium on a May 10 is $1, and I sell the option when NM is at $15, I realize a 5-1 return, compared to a 27-1 return on the lower premium.
Obviously, the longer the time until expiration, the higher the premium. I believe that NM will reach its price before March expiration, so I see no point in buying May.
Regardless, I believe that options are still the best bet. A 400% return is not shabby at all (especially in a few weeks). I wouldn't suggest a strike higher than 10. If your broker can do it, March 12.5 calls might offer the best return at this point. I say that only because I've no idea if the stock will move above $15, and besides, a strike of $15 is much too risky at this point.
I believe that there are at least two buyers, because there was a lot of accumulation a few months ago, and in recent weeks. The amount that was purchased would have amounted to more than 5%. We would have seen a 13D by now. Since this buying frenzy began last Thursday, and at least one buyer has likely surpassed 5%, we'll probably see a 13D next Wednesday or Thursday.
TDW |
