No. of Recommendations: 16
Nope, wasn't me, for various reasons.
I don't usually buy newly minted options the first week they are listed, as anecdotally I have perceived that it takes a few days for the market makers to settle into a groove.
And I haven't rolled any calls lately (they're January 2025) as there is no need yet. My last purchase was plain old shares.
But I'm happy to show the math on how I calculate the cost of the leverage.
This one is a little more complicated than my usual, as they pay dividends.
My usual method is to compare buying the stock to buying the call and exercising it on expiration date.
The two differences are how much cash is tied up from now till then, and the extra cost of tying up less via calls.
Stock closed at $109.76 yesterday.
I believe the NBBO bid/ask on the Jan 2026 $90 calls was 35.40 / 37.90
I therefore assume these calls could be bought for $37.30. (3/4 of the way up the gap, rounded up to the nearest nickel)
That gives a breakeven price of $127.30, which is $17.54 higher than simply buying the stock at close.
BUT, the buyer of a call is also foregoing regular dividends. (options buyers do get compensated for extraordinary dividends, don't worry about those)
Assuming the regular payout stays the same, as the options market generally does, you're missing out on 10 payments of $0.59, or $5.90.
Since I pay 30% tax on US source dividends, the amount foregone by me is 70% of that or $4.13. Adapt the rate to suit your personal situation.
We add that to the increase in cost of going with calls, so $17.54 rises to $21.67.
i.e., my breakeven price is $21.67 worse buying calls today and exercising them on expiry date, compared to buying stock today.
I'll ignore the quite small time value of money on the dividends themselves.
Now, buying the call means I only have to put up $37.30 in cash today, rather than the $109.76 I would have to cough up to buy stock.
So, my cash tied up (and incidentally maximum possible loss) is $72.46 lower.
Consequently, the extra price I'd be paying for options can be considered the [prepaid] interest on a loan of $72.46 for 847 days or almost exactly 30%.
Annualizing that linearly for simplicity, that works out to an annualized rate of 12.9%/year.
That is a huge rate to pay, so at the moment it probably makes much more sense simply to buy stock.
I deem it likely that the price will be a fair bit higher and the implied interest rates for any given strike a whole lot lower some time within a year or so, so you could switch from stock to calls at that time and have a much better breakeven.
As usual, no guarantees I did that match correctly, check each step : )
If you still wanted to buy calls but didn't want to pay quite that much, you might consider something needlessly fancy like a call ratio back spread.
e.g., sell at-the-money call(s) with lots of time value to (help) fund a larger number of away-from-the-money calls.
You lose a small amount of money if the stock price remains more or less unchanged, if it tanks you have a capped small loss or profit (depending on the calls you buy), but you still get unlimited upside.
Jim
