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  • matollionequay matollionequay Jan 27, 2011 2:11 PM Flag

    Advice on buying calls

    The put call spread is an aggressive play for someone who is either very confident BBT doesn't go below $25 or is happy to purchase it at that price if it does.

    I think the play you want is to buy the 30 call
    so you will make money if BBT is enough above 30 to offfset the price of the call. Your prediction of 35 should allow you to double your money.

    The problem with the 35 (based on your premise that it will reach 35) is that it has a value at the strike date to the extent that BBT is over 35. So you could be correct but not make much or any money.

    The sooner the stock hits your strike price the better as options have a time component in their value. So if the stock hit 35 well in advance of the strike date you might make more money selling the option then than waiting for further appreciation going into the strike date.

    Option contracts are for 100 shares so if you issue an order keep that in mind. An option that costs 1.90 will cost 190 for one contract.

    It is also likely that your broker will require you to complete some additional paperwork to allow you to trade options.

    Welcome to the casino.

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    • Good points.

      I agree the strategy I described is aggressive (with a large downside risk). However, given that the put call spread generates $7,000 in cash, BBT would have to drop down to around $22/share by Jan 12 before the trader would be in the red. The odds are that the price will not reach either $22/share or $35/share by Jan 12, thus I like this trade to simply buying call options. Just depends on how strong your stomach is.

35.75+0.12(+0.34%)Oct 2 4:01 PMEDT