If I thought the S&P was going to 1125 by end of year, what call option to buy?

Discussion in 'Options' started by ang_99, Oct 6, 2009.

  1. What SPY call option would give me the best bang for the buck? That would equate to say 112.5 for the etf.

    I'm requesting info from option guys as I've never bought or sold an option before.

    Thanks in advance.
  2. We need assume several things first in order to answer your question.

    Assuming on Dec 31, 2009, SPY closes at 112.5 and also assuming you are going to buy calls tommorrow and plan to hold them at least until Dec 31, 2009.
    Also assuming IV won't change much (???)

    Then to maximize the profit potential ( percentagewise, I assume that is you have in mind ), you need buy a series available after 12/31/2009, the 1st one available right now is 2010 March series.

    The next steps is select several strikes and compare their return percentage-wise on Dec 31, 2009 with SPY at 112.5,
    to do this quickly , let's use The Options Lab, see attached screen shot.

    Fill in the four legs with same data except the strike.

    Go to control section and change to 86, which is 86 days from now to Dec 31, 2009, and stock to 112.5.

    The P & L % columns will show the return percentage wise on Dec 31, 2009 whe SPY stays at 112.5
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  3. and here is the chart, please note that I only select four different strikes as example, you might want to change the Strike to see what return each one has.
    • spy2.png
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  4. Interesting, so what does that blue line tell me? Its kind of hard to follow for an option newb.
  5. The blue line show you the combined P & L if you buy all the four strikes together. It is mentioned on the right-hand side in the 2nd screen, called Net P & L
  6. People rarely hold options contracts that long. They usually change their mind and close their positions long before target date. Buy and hold options is lot harder than buy and hold stocks.
  7. You have a bit of a problem here. Go to the following page:


    This is the 2010 call option for the SPY. Right now the SPY is trading around 105. So take three different options, ITM (in the money), ATM (at the money), OTM (out of the money).

    Taking an ITM of 100, the option price is: 11.10. This means to be profitable you will need something higher than 100 + 11.10=111.10 at the end of march.

    Let's take an ATM the option of 105, with a price being. 105 + 7.45 = 112.45

    And now let's look at OTM of 110 with a price of 4.72, with a price of 114.72.

    When you look at these prices the market is saying that to be profitable the market will have to move higher than what you are predicting.

    Now the option is for March and you are saying December. And in the other picture with the blue line what you are seeing is the value of the option due to time.

    I would be careful because if the market goes to 112.5 you are saying probably that there will not be a pullback and hence IV will drop. This means by the time December rolls around you might not see any profit.

    People think right now that volatility is cheap, but I disagree. Look at this chart.


    Volatility is cheaper, but not cheap. And if the market keeps grinding up volatility will get even cheaper.

    And that is a problem. You see the market is pretty much pricing what you are thinking. Thus it means you are not going to be profitable since those selling are thinking, "hey I am not giving free money away."

    If you only want to buy and you are sure that the market is going up, then just buy the SPY shares and wait.

    Another option is to reduce your price cost of the options, by buying a call spread. If you are sure that the market is not going to be higher than 112.5 then sell the 113, and buy the 108, giving a net cost of 5.70 - 3 = 2.70, and a profit at 110.70, but capped at 113. Thus the max profit you can make is 2.30 on 2.70 investment.

    What would I do? Buy the shares and be done with it. Your movement expectations are too close to what the market is pricing and hence the likelihood of being profitable are remote.

    Do you have a higher loss potential with buying? Sure if you plan on making this a trade. But ask yourself, will the S&P never go beyond this level? Will it be beyond this level at the end of 2010?

    Options are a difficult animal and I have a had good friend who told me that difficult means challenging means I can make money if I think it through. Beep wrong.... While he made some wins he also made some losses and I wonder if they balanced out. I doubt it.
  8. or you could:
    buy the spy jun '10 110 call
    sell the spy jun '10 120 call

    would cost about $375 per position

    close at year end

    but there are far better option traders than me at this site.
  9. spindr0


    There are two answers to that question.

    The first one is that if you have to ask that question here then you shouldn't be trading options yet.

    The second one is geared to helping you learn something resembling the answer. :) You need to provide a time frame for your up move. Then you can input various months and strikes into a pricing model and the output will enlighten you.

    Unfortunately, it's not that simple since there's a little detail called IV. For most, that's implied volatility but for some, it's what you'll need for the shock of buying without having a clue and seeing the magic of money disappear right in front of your eyes :)
  10. buy jan 130 calls,sell against them dec 120 calls.

    or if you are sure,that around dec expiration it will be really in some range,do a butterfly:
    short dec 110
    short dec 110
    long dec 120
    long dec 100.

    the first spread is calendar-very low loss,even if the underline doesnt move from today's levels,you would make some money,and as close to the stike of the short calls it moves,as bigger the gain would be.

    the second spread is highy profitable-if u hit by exp. 110,u ll make over thousand % .........
    #10     Oct 10, 2009