You have the concept correct. However the buying of options is where the fly gets into the ointment. When you buy you have to be right twice. You have to be right the direction and right with the time frame.
When you sell the option you can be wrong directionally and still win. Simple example, collect $1.30 on the $15 strike. Your breakeven is now at $13.70 and the stock is $16.70. lots of room in there. So the stock can go against you $3.00 and you're still alright. 55% probability of expiring above 15.00 (JAN15 prices)
On your LEAP, the stock MUST move long to benefit you and the sooner the better as each day goes by, your long call decays in value.
Slightly giving you the edge when you sell premium. When buying, you do have the slight chance of hitting a home run.
The deeper in the money that your LEAP is, the more it costs but the time premium is much less. You can be "right" on direction at a much later date and still get paid better.
When you sell the option you can be wrong directionally and still win. Simple example, collect $1.30 on the $15 strike. Your breakeven is now at $13.70 and the stock is $16.70. lots of room in there. So the stock can go against you $3.00 and you're still alright. 55% probability of expiring above 15.00 (JAN15 prices)
On your LEAP, the stock MUST move long to benefit you and the sooner the better as each day goes by, your long call decays in value.
Slightly giving you the edge when you sell premium. When buying, you do have the slight chance of hitting a home run.
(12-17-2013, 10:09 PM)Kerim Wrote: Here’s another question for you while I’m at it. Say I’m looking at the Jan 2015 calls, what does conventional wisdom say about choosing a strike price that is in the money or out of the money? I guess I’ve assumed it is better to grab something with a little intrinsic value, but perhaps it makes no difference?
Thanks so much for your help!
The deeper in the money that your LEAP is, the more it costs but the time premium is much less. You can be "right" on direction at a much later date and still get paid better.