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Strategies & Market Trends : The Options Box -- Ignore unavailable to you. Want to Upgrade?

To: Poet who wrote (88)	5/10/2000 8:44:00 AM
From: Eylon	Read Replies (1) \| Respond to of 10876

only my general sense that, unless you're buying at the nadir of a fast "tank", ahead of a news item that will send the stock upwards, or in a bull market, the risk associated with buying OTM calls, as opposed to ATM or ITM, is prohibitive. OTM calls can lose two ways and win only one. The faster time decay of the OTM options mean that if the stock stay in the same price range you lose more of your money. To continue on the example of cree option: if one month from now cree price is still $125 the June 90 call will lose about 8% of its value but the June 180 call will lose 97% of its value!! The higher leverage of the OTM calls will work against you if the stock is going down the same way that it will work for you if the price is going up. So a 5% price drop tomorrow in cree will results in about 14% drop in the 90 calls and 32% drop in the 180 calls. OTM calls are a great way to get that big gainer that we all want but most of them results in big loses. If you want that large leverage you should buy OTM leaps so the time decay will not kill you and the stock have enough time to appreciate. For short time options, unless you are sure that the stock is going up NOW, OTM option are almost a sure way to lose money. ITM short options are a lot safer. If you want to be even safer buy the stock or stay in cash. Eylon