Long Call or Long Stock?

[tucciotrader 10]

Hi,

 

suppose I have bullish feeling for a given stock on a twelve months time basis (from now to twelve months from now).

 

What is the main difference between purchasing a call at-the-money for that stock instead of purchasing the stock itself?

 

I have come to think that buying a call option ATM can be less expensive that buying its underlying. The only drawback is that I won't get any div-hields and I'll be cut off in twelve months.

 

Also, the break-even point will be strike + premium paid...

 

Having said that, is still buying a call option a good way to make money if my bullish feelings turn out to be true?

 

thanks

[MadMarketScientist 11]

I'm sure there will be a lot better replies than mine since I'm not an expert in options but...when you buy an option with that much time value you are going to pay a heft premium due to the extended time value. If that stock marches higher you'll do fine, though over time you will have that time value come out regardless of the advance of the stock.

 

On the flipside, if the stock goes sideways or even slightly higher it may not be enough to even maintain value and you do have the chance of losing 100% of your investment, whereas with the stock you may have only lost 5% if it declined slightly.

 

That being said, you can clearly control a lot more of the stock for less with the options, and you will know your max risk/loss going in -- just the options premium.

 

MMS

[tucciotrader 10]

ok, thanks! so I'd better long an out-of-the-money call instead...it's by far less expensive and it can turn out to be a great deal in the short run, provided some high volatility takes place...

[cuttshot 11]

A few things come into play here. Keep in mind the ATM option will have the highest theta which means time decay will be greatest. I typically will only go with and ATM option if I'm only planning on being in the position for a few days to a few weeks.

 

If you go with the OTM option all you are dealing with is time premium. OTM options also have a low delta which means it's going to take a larger move in the stock for you to start seeing profits.

 

With this in mind, if you want to mimic a stocks move with options you will want to go with ITM options. Often times a deep ITM option is referred to as a stock replacement strategy. Look for an option with a delta of .70-.80. You will pay more for this option but you will also experience profits much sooner than if you were to go with the OTM. Also keep in mind you are still controlling the stock for much less than buying the stock outright.

[tucciotrader 10]

A few things come into play here. Keep in mind the ATM option will have the highest theta which means time decay will be greatest. I typically will only go with and ATM option if I'm only planning on being in the position for a few days to a few weeks.

 

If you go with the OTM option all you are dealing with is time premium. OTM options also have a low delta which means it's going to take a larger move in the stock for you to start seeing profits.

 

With this in mind, if you want to mimic a stocks move with options you will want to go with ITM options. Often times a deep ITM option is referred to as a stock replacement strategy. Look for an option with a delta of .70-.80. You will pay more for this option but you will also experience profits much sooner than if you were to go with the OTM. Also keep in mind you are still controlling the stock for much less than buying the stock outright.

 

Does the above go for buying put contracts too when having bearish feellings?