A Message to Call Buyers

This is a response to a recent forum post:

Opinions wanted!! AAPL

Posted by carparker on April 30, 2012 (12:19PM)
Hey folks,

I'm considering buying some May 4 AAPL calls. Where is the price headed this week?

Mark’s Response:

I understand that every options trader has his or her favorite methods for trading. However, I find a message such as this to be very stressful because the person asking has ignored all of the important considerations when buying options. So, in reply to your query, here are my questions:

Dear carparker,

1.     Thanks for asking for my (and other) opinions about where the stock is headed. Do you really want to place your trade based on these opinions?

2.     Once you get a consensus, are you going to make a sensible choice and not buy options that are out of the money?

3.     How are you going to decide whether the options are fairly valued?  If you pay too much, it is going to be difficult to make a potential profit.

4.     What is our profit objective, and is buying call options the best way to earn that profit?

5.     Would you consider a trade with a higher probability of making money – but one in which profits are limited? Or are you going for a home run?

6.     I’m sure you understand all that can go wrong when you buy options. Yes, losses are limited – and that’s about the only truly good thing about trying to make money when buying options.

7.     I urge you to learn about selling out of the money put spreads instead. Not when you are humongously bullish, but at times like this when you want a bullish play to potentially earn some money.

8.     I cannot recommend strike prices, but if you choose options that are not too far out of the money, you could collect enough credit to provide a decent profit. And losses are limited.

9.     As I write this, the 580 call is going for just under $8[APPL is 584.5]. Instead of investing $800, you could sell [note this just a random example, not a recommendation] the 575/580put spread and collect roughly $1.40. If you sell two of these spreads, then your maximum loss is $729 (plus commissions) – less than you may lose when buying the call option.
The maximum gain is only $280 (minus commissions), but you are far more likely to earn that profit than you are to come out ahead when buying the call option. In fact, the stock does not have to rally. You can make a profit when the stock is slightly less than $580 when expiration arrives. That’s the nice part of this trade. You can be wrong and still potentially profit.

Mark D Wolfinger
Options for Rookies
Apr 22, 2012

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