Readers' questions about what options strategy to employ usually take two forms; the first asks what will deliver the best returns for a given scenario:
Suppose I come to the conclusion that a certain stock or commodity will be trading at least 20% higher during, say, the next six months than it is now. I look up the option chain and see many different call strikes offered that expire six or more months from now. Is there a theory that will help me make a rational decision on which expiration/strike is the best? Up until now I have been going for the cheapest, most out-of-the-money one. That probably isn't the best strategy. Many thanks again. R.R.or people looking for alternatives to a suggested position:
Steve, How about selling puts, let's say February '04 of 320 and buy February '04 375 and finance the call. Thanks, R.B., referring toOnce I'm over the initial shock that someone would consider an alternative to my suggestions, I realize these great questions bring together many of the concepts discussed in previous columns. Seriously, this is a good time to emphasize that any recommendation is just one of many ways to skin a (insert your animal here). One of the primary attractions of using options as a trading or investment tool is the flexibility they provide, essentially allowing you to create a customized position that jibes with your specific situation or prediction; there is no one right "answer." Unlike going long or short the underlying, whose success is measured in the single dimension of buy low/sell high, option positions have a multiple of inputs, such as time and volatility, which create a much more dynamic strategy.
last week's columnon gold and the suggested calendar spread.