Dykstra: Growth in Store

I'm struggling through how to do DITM calls. Looking at the Yahoo!(YHOO Quote - Cramer on YHOO - Stock Picks) options for October '07, it looks like you chose the 22.50s for $6.40 because the ones having strike prices below that add up to approximately the same total (option price plus strike price) as the ones you chose but cost more per contract, and the ones with strike prices above that, like the next one which is the 25.00/4.40s, represent a bit more jump up in the total. Is that how to pick an approximate level to go for? Thanks for your time.

You have basically figured out the approach. The options that have a higher strike price are not deep in-the-money, they are near-the-money. Near-the-money options present a much higher level of risk, because if the underlying stock decreases in value, the near-the-money calls will become out-of-the-money, while DITM calls have more leeway to implement an effective trading strategy, whether it be dollar-cost averaging or simply hold and wait.

If I were to buy calls with a lower strike price, that would only increase my exposure and my potential risk in each trade. Provided I can find a premium in the $1 range and the options are DITM, then the strategy can be implemented effectively. As a result, I find the right balance between a low premium and a DITM level.

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First off, thanks for the excellent columns. I am enjoying them very much, learning along with you, and recently opened my first DITM position. I wonder if you might address in a future column how you go about determining the next DITM buy level, as listed on your weekly scorecard. This is the only column on the chart that I'm not clear on after having read your columns for a while now.

Just to clarify, several readers have inquired about the next DITM buy level. This column is there to provide readers with an idea of the technical levels I look for in a stock. These buy levels are the relevant moving averages that provide the next level of support for each of the DITM calls and, as a result, will provide a boost to a declining stock price. Using a dollar-cost average strategy, DITM traders can use these buy levels in order to increase their profit potential.

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