Everyone wants to hit it big in options. They hear stories like mine where someone took 2K and made it into 150K in a few years and want to get there in a few weeks. This is a recipe for disaster. Options can be very lucrative but you need to stay in the money, at the money, or near the money. When in the money or near the option prices move very closely to the actual stock and therefore if the stock does what you planned on it doing ,you benefit. How many times has a stock gone the direction you wanted but stopped just short of your strike? The reason most people go further out is the cost. They don’t have the money to buy large amount of contracts at the money. Second is they want doubles and triples rather than 40 percent gains. Let’s use Celgene as an example. The stock is trading at $70.71.
We’ll use calls because I like this one. The 65’s are trading at $6.20. The 70’s are at $2.70 and the 75’s are at $1.00. If you are safe you should play the 65’s. Feel real good about the stock play the 70’s. Don’t touch the 75’s. It is for a straight up gambler. Just too far out of the money to be a wise investment. Yes the payoff could be huge but its a sucker trade. If you must, put a small percentage of the trade in those way out of the money. The only time I find it acceptable for those, are in leaps and further out options. I recently purchased a large amount of March OXPS options at the 25 strike (calls) and the stock was at 19. I would never have purchased these in the front month. I purchased them in December with the thought that the stock would go up and even if it wasn’t close there was so much time left I would just get out with a nice gain. Luckily the stock gained momentum and now they are 4 points in the money with 2 months left. This is an exception more than the rule. In summary, don’t swing for the fences because you will more than likely strike out. If you keep hitting like Mark Grace, you’ll still get rich. You might even get traded to Arizona.