34 lines
2.4 KiB
Plaintext
34 lines
2.4 KiB
Plaintext
Gapter 3: Call Buying 103
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is not exact, because it often takes time for an extreme change in sentiment to reflect
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itself in a change of direction by the underlying.
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Hence, for a strategy such as this, one would want to use an option with a small
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er delta. The investor would limit his risk by using such an option, knowing that large
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moves are possible since the position is going to be held for several weeks or perhaps
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even a couple of months or more. Therefore, an at-the-money option can be used in
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such situations.
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I.ONG-TERM TRADING
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If one's strategy is even longer-term, an option with a lower delta can be considered.
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Such strategies would generally have only vague timing qualities, such as selecting a
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stock to buy based on the general fundamental outlook for the company. In the
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extreme, it would even apply to "buy and hold" strategies.
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Generally, buying out-of-the-money options is not recommended; but for very
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long-term strategies, one might consider something slightly out-of-the-money, or at
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least a fairly long-term at-the-money option. In either case, that option will have a
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lower delta as compared to the options that have been recommended for the other
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strategies mentioned above. Alternatively, LEAPS options might be appropriate for
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stock strategies of this type.
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ADVANCED SELECTION CRITERIA
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The criteria presented previously represented elementary techniques for selecting
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which call to buy. In actual practice, one is not usually bullish on just one stock at a
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time. In fact, the investor would like to have a list of the "best" calls to buy at any
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given time. Then, using some method of stock selection, either technical or funda
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mental, he can select three or four calls that appear to offer the best rewards. This
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list should be ranked in order of the best potential rewards available, but the con
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struction of the list itself is important.
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Call option rankings for buying purposes must be based on the volatilities of the
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underlying stocks. This is not easy to do mathematically, and as a result many pub
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lished rankings of calls are based strictly on percentage change in the underlying
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stock. Such a list is quite misleading and can lead one to the wrong conclusions.
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Example: There are two stocks with listed calls: NVS, which is not volatile, and VVS,
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which is quite volatile. Since a call on the volatile stock will be higher-priced than a
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call on the nonvolatile stock, the following prices might exist: |