Some of my readers have written to say they are puzzled that the prices I set for my call options are higher than those they see available in the options market. So today I'll recap why that happens and how important it is not to overpay.
My strategy wins by buying calls that are deep in the money (DITM) and only at a price I find attractive. At times, I shoot for a purchase price well below the price of the last option traded.
Let me explain how I arrive at a good price. By adding the strike price to the option price, the total of the two should not be more than a dollar higher than the current stock price. If the premium is $1 or less, then the price is right, and my pick is a good one. The difference can go above $1, but paying more reduces my chances of success.
If I expect the stock or the market will go down significantly, I set my purchase order below the last trade and wait for the market to meet my price. If my order is filled at that lower price, I've sidestepped the pitfall of overpaying, and I've gotten a bargain. But I am patient. It may take a few days for the market to meet my price.
A lower price sets the stage for success. The lower the price, the less ground it must cover before it meets my good-till-cancel (GTC) order, which I set at $1 above my average purchase price. Conversely, if I pay too high a price, it can take months for the options price to jump up and meet my GTC price. Meeting that price is the payoff that allows me to grab my win.
If my original contract is never filled, I haven't lost anything.
That in a nutshell ensures I don't overpay and improves my chances of success.
I've recently had wins with
Archer Daniels Midland
On this trading holiday, I wish you and yours a day of peace and happiness.
Always remember: Life is a journey, enjoy the ride!
Lenny Dykstra manages Nails on the Numbers, a subscription service sold by TheStreet.com. Click here for a free trial. Dykstra writes regularly about options trades for TheStreet.com
At the time of publication, Dykstra had no positions in stocks mentioned.
Nicknamed 'Nails' for his tough style of play, Lenny is a former Major League Baseball player for the 1986 World Champions, New York Mets and the 1993 National League Champions, Philadelphia Phillies. A three time All-Star as a ballplayer, Lenny now serves as president for several privately held businesses in Southern California. He is the founder of The Players Club; it has been his desire to give back to the sport that gave him early successes in life by teaching athletes how to invest and protect their incomes. He currently manages his own portfolio and writes an investment strategy column for TheStreet.com, and is featured regularly on CNBC and other cable news shows. Lenny was selected as OverTime Magazine's 2006-2007 "Entrepreneur of the Year."