No. of Recommendations: 11
So opened a position in DG January 2025 160 calls.
Just a thought:
Options where the strike price is very close to the current stock price are very expensive: that is where the "time value" peaks.
If you have a little extra cash lying around, a strike price even a small amount lower will have a substantially lower breakeven.
For example, if you sold your 2025 $160s and bought 2025 $145s, the net result would be
* You would tie up about $8.78 more in cash per share till January 2025
* You would lower your breakeven by about $6.22 per share.
If you consider that replacement as a stand-alone transaction, (and assume the firm won't go bust!), that's a profit of 71% on the new money.
You're investing the incremental cash at a guaranteed annualized rate of return of 39%/year compounded.
Your maximum money at risk if the company goes bust is 30% higher. Personally I doubt it, but it's your assessment that counts.
I actually bought a few out-of-the-money calls for fun. Jan 2025 $180s cost me under $20 each, breakeven under $200, which is lower than the stock price the day before.
(if you squint just right, you could think of that as uncallable 10:1 leverage for free)
I will sell them the first time the stock price rises to $180, which is when the time value will peak, and do something else with the money.
Roll to a lower strike if I want to keep the position, or just take the quick profit for beer money, or a better investment if one comes along.
Jim
