Ok... stupid question:
Jan'10 call options for RMBS:
15.0: BNQAC 6.50
20.0: BNQAD 4.30
25.0: BVJAE 2.95
30.0: BVJAF 1.90
So a call option is the right to buy stock at the call price before (in this case) Jan 16, 2010. I'd pay the call option price for this right.
That said, just for argument, let's say I think RMBS will hit 32 or more by that January. Why wouldn't I just buy as many call options at 15 as possible? (Let's assume that volume isn't an issue; I'm poor, even 1000 options is a shitload to me.)
I guess I don't understand how the price of the option scales with the strike price. That is, if it costs 6.50 now to buy rmbs at 15 in Jan'10, why wouldn't it cost ~1.50 to buy rmbs at 20 in Jan'10? I mean I can understand that they'd be somewhat different--linear scaling can't go forever or the price would be negative quickly. So away from current stock prices, options probably go toward 0 exponentially as strike price rises. On the other end as strike price goes to 0, the relation does seem to become more and more linear. But a $5 change in strike price doesn't correspond to a $5 change in call option price. Obviously I'm missing something [huge]. I'd be thankful if someone explain a little or link me somewhere that can...
But really the bottom line question is: if the above 4 calls are my only choices and I think rmbs will exceed 30, why wouldn't I just buy some 15 calls?
-Eric
Jan'10 call options for RMBS:
15.0: BNQAC 6.50
20.0: BNQAD 4.30
25.0: BVJAE 2.95
30.0: BVJAF 1.90
So a call option is the right to buy stock at the call price before (in this case) Jan 16, 2010. I'd pay the call option price for this right.
That said, just for argument, let's say I think RMBS will hit 32 or more by that January. Why wouldn't I just buy as many call options at 15 as possible? (Let's assume that volume isn't an issue; I'm poor, even 1000 options is a shitload to me.)
I guess I don't understand how the price of the option scales with the strike price. That is, if it costs 6.50 now to buy rmbs at 15 in Jan'10, why wouldn't it cost ~1.50 to buy rmbs at 20 in Jan'10? I mean I can understand that they'd be somewhat different--linear scaling can't go forever or the price would be negative quickly. So away from current stock prices, options probably go toward 0 exponentially as strike price rises. On the other end as strike price goes to 0, the relation does seem to become more and more linear. But a $5 change in strike price doesn't correspond to a $5 change in call option price. Obviously I'm missing something [huge]. I'd be thankful if someone explain a little or link me somewhere that can...
But really the bottom line question is: if the above 4 calls are my only choices and I think rmbs will exceed 30, why wouldn't I just buy some 15 calls?
-Eric
See chart below. If you think the stock will go to 32, then the best option is the 20 strike for $4.3, because you will make 2.79x your money. If you think it will go to 40, then the best option is the 30 strike for $1.9 because you will make 5.26x your money, vs 3.85x your money if you buy the 15 strike.
__________ 32 __33 _ 34_ 35 _ 36 __ 37 _ 38 _39_ 40
15.00 6.50 2.62 2.77 2.92 3.08 3.23 3.38 3.54 3.69 3.85
20.00 4.30 2.79 3.02 3.26 3.49 3.72 3.95 4.19 4.42 4.65
25.00 2.95 2.37 2.71 3.05 3.39 3.73 4.07 4.41 4.75 5.08
30.00 1.90 1.05 1.58 2.11 2.63 3.16 3.68 4.21 4.74 5.26
Oh shit. I was comparing apples to oranges. i.e. if I am to buy exactly 100 options, then I'm best off buying at 15. But 100 options of 15 costs more than 100 options of any of the others, so I failed to compare a like "cost basis" or whatever you call it.
Fail. Thanks for helping me realize that JS80
While I know how to solve the equation on a computer, I don't have a very good intuitive feel for how solutions work.
For example I work with the Navier Stokes eqn regularly. If you drew me say a wing shape, and gave me some incoming air conditions, I could qualitatively describe what will happen. With Black Scholes, if you set up a problem for me I'd have no idea.
Also, isn't rmbs a litlte more complicated than the standard black scholes model? It isn't really that random right now... or at least I hope court decisions aren't as arbitrary as flips of a coin.
Like when I think of Black Scholes, a plot like this comes to mind: from wiki. In that plot the strike price is $10. Looking at the $10 stock price curve, the option price goes from 0 to 10 exponentially with time which is a result of uniform random, b/c far enough in the future, nobody knows what will happen. But that's not exactly the story I see looking through rmbs options prices.
Originally posted by: eLiu
Oh shit. I was comparing apples to oranges. i.e. if I am to buy exactly 100 options, then I'm best off buying at 15. But 100 options of 15 costs more than 100 options of any of the others, so I failed to compare a like "cost basis" or whatever you call it.
Fail. Thanks for helping me realize that JS80
as a general rule, do STRIKE PRICE + OPTION PRICE = effective buy price. So if the strike is 30 and the price is 1.9 then you are effectively buying the stock for $31.90 but you only put up a fraction of the money vs buying the shares outright. The trade off is you can't lose more than you paid but you have to pay a "premium."
- Jan 23, 2002
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eLui,
I just wanted to note a few things:
#1. You do realize that, for example, Jan 2010 $30 calls is not $1.90 each right? A contract is 100 shares, so it's really $1.90 x 100 = $190 per contract. So buying 100 contracts is big in most people's eyes as it's going to cost $19,000 + option commission.
#2. JS80's scale doesn't account if the price goes up vs time remaining left on the options. Option price is determined by the intrinsic value, time value that's left and the implied votility. Again, for instance, Jan 2010 $30's were selling for .74 cents when I bought it a couple weeks ago. They're selling for $1.90 now because of price appreciation in the stock. If RMBS goes to $30 this month, votility would be crazy and the calls would be worth A LOT more than $1.90. Probably over $6.00.
#3. Very few people buy options for "the right" to buy at the strike price. It's almost always better to sell the options for profit and buy the shares if you wanted to own the stock. You buy options for the added leverage, with the knowledge that you need to time things perfectly.
#4. With my closing comment on #3 above, buying call options are very risky because you have to be right in 3 areas.
a) The stock HAS to go up, you lose if it goes sideways or down.
b) You need to be right how high it goes up.
c) You need to be right how much time it takes for it to go up to the strike price.
I just wanted to note a few things:
#1. You do realize that, for example, Jan 2010 $30 calls is not $1.90 each right? A contract is 100 shares, so it's really $1.90 x 100 = $190 per contract. So buying 100 contracts is big in most people's eyes as it's going to cost $19,000 + option commission.
#2. JS80's scale doesn't account if the price goes up vs time remaining left on the options. Option price is determined by the intrinsic value, time value that's left and the implied votility. Again, for instance, Jan 2010 $30's were selling for .74 cents when I bought it a couple weeks ago. They're selling for $1.90 now because of price appreciation in the stock. If RMBS goes to $30 this month, votility would be crazy and the calls would be worth A LOT more than $1.90. Probably over $6.00.
#3. Very few people buy options for "the right" to buy at the strike price. It's almost always better to sell the options for profit and buy the shares if you wanted to own the stock. You buy options for the added leverage, with the knowledge that you need to time things perfectly.
#4. With my closing comment on #3 above, buying call options are very risky because you have to be right in 3 areas.
a) The stock HAS to go up, you lose if it goes sideways or down.
b) You need to be right how high it goes up.
c) You need to be right how much time it takes for it to go up to the strike price.
#1: Nope, but I would have realized that quickly had I ever tried to buy anything. My original statement meant 1000 shares, not 1000 contracts. Clearly I'm not familiar with the terminology.
#2: So that kind of boils down to the higher strikes have more potential for win, but put more burden on you to be correct in your estimation...?
#3: I see. I thought part of the point of options was being able to pick up shares of X without as much money to start. Good to know.
Thanks for the info/tips
I mean for the time being this is just for my education b/c I couldn't buy options right now if I wanted to (apparently didn't sign up for it on my etrade acct). And I'm not decided on actually wanting to buy options or if it's suicide.-Eric
If it goes to 30 this month, I will come too.
Really any time before January is fine with me.
Having said that, looking at my portfolio after work I thought I would have lost more than I did.
Fortunately, life goes on, I can live with a 50% loss before I have to sell higher calls to foot some of the bill in these options.
Really any time before January is fine with me.
Having said that, looking at my portfolio after work I thought I would have lost more than I did.
Fortunately, life goes on, I can live with a 50% loss before I have to sell higher calls to foot some of the bill in these options.
Er, is there a difference between what we've been referring to as "call options" and "long call options"? The internet leads me to believe that they are the same thing.
That is, if I wanted to buy/sell options (not write options), is this what I would sign up for (on etrade):
Level 2 is all Level 1 strategies, plus:
* Synthetic long puts; * Married puts; * Long calls; * Long puts; * Long straddles; * Long strangles; * Covered puts (short stock and short put position)
note: level 1 strategies are composed of things you can do relating to covered calls.
Level 3 and 4 are all about equity spread, index spreads, and naked options. I don't see a listing for just buying/selling existing options.
That is, if I wanted to buy/sell options (not write options), is this what I would sign up for (on etrade):
Level 2 is all Level 1 strategies, plus:
* Synthetic long puts; * Married puts; * Long calls; * Long puts; * Long straddles; * Long strangles; * Covered puts (short stock and short put position)
note: level 1 strategies are composed of things you can do relating to covered calls.
Level 3 and 4 are all about equity spread, index spreads, and naked options. I don't see a listing for just buying/selling existing options.
AFAIK, you don't need to list what your current portfolio is if you aren't making recommendations or are an analyst giving your opinion on a stock to encourage others to purchase. You're taking the CFAI guidelines a bit far....especially for this place.
Originally posted by: LegendKiller
I am bored as well
I would like to see others opinions as well.
But I agree, post erased.
- Jan 23, 2002
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I think I'm going to rebuy the TSRA Sept $30's I sold previously to lock in the gains.
Quick briefing:
TSRA has two major court cases, both with the same judge. The judge ruled TSRA couldn't enforce their patents in the first case, but as we know through the huge run TSRA went on, the ITC commission over ruled him. This was the case against certain cell phone manufacturers.
The other case is on DRAM and he was expected to rule on this in July. However, given the recent events in the first case, he needs additional time and has postponed his judgement until the end of August.
My initial reaction is he is going to rule in favor of TSRA. No judge wants to be wrong twice and the case is essentially the same, just different products are infringing. Then again, judges can be stubborn too and he might go against TSRA again and we will have to wait about a while to see if he gets overturned by the ITC commission.
So, expecting an August decision, September provides the most leverage if you think there will be no more delays and that the decision will be favorable.
Quick briefing:
TSRA has two major court cases, both with the same judge. The judge ruled TSRA couldn't enforce their patents in the first case, but as we know through the huge run TSRA went on, the ITC commission over ruled him. This was the case against certain cell phone manufacturers.
The other case is on DRAM and he was expected to rule on this in July. However, given the recent events in the first case, he needs additional time and has postponed his judgement until the end of August.
My initial reaction is he is going to rule in favor of TSRA. No judge wants to be wrong twice and the case is essentially the same, just different products are infringing. Then again, judges can be stubborn too and he might go against TSRA again and we will have to wait about a while to see if he gets overturned by the ITC commission.
So, expecting an August decision, September provides the most leverage if you think there will be no more delays and that the decision will be favorable.
- Jan 23, 2002
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Yeah, but it was even more expensive a couple weeks ago. I sold them out for $2.35, I think they went up as high as $2.60 or something.
I bought back in, TSRA Sept $30's for $1.10.
I also bought more TIVO on the big dip before the recovery, not sure if it's stop loss snowball manipulation or something else.
Originally posted by: jjsole
Originally posted by: Azurik
Lothar,
Where were you when RMBS rose 250% in less than two months?
He was still gloating over RMBS losing 65% the previous two months...
I haven't followed the RMBS case (altho the volatility is hard to miss.) What might happen with the Whyte meeting...can he disregard delaware and let his case proceed (is that the bet that the pro-RMBS investors are making at this point)?
Once again, Lothar is nowhere to be found when RMBS takes off......
lame
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