Buying OTM Call Options - Take advantage of the market "melt-up" ?

[Lemur]

One Tempting Example:
MSFT 18th Sep $220.00 Call - Mid Price per option at time of post: $255

Also here for stories: Has anyone here ever gambled on a OTM Call Option for a chance to have big returns? My take is your odds are much better then playing the lotto...especially if you believe we're in a melt-up.

Definition: Described as a sharp acceleration higher in a rallying market, driven by a stampede of investors who have missed the up move and fear missing out entirely.

I'm thinking there will be a lot of rallying before the election...idk my thoughts are scattered from observing TSLA swings lately.

Would there be an intelligent way to play this or is this really just gambling?

[ertyu]

well, if you really think msft is going up, sell weekly puts below mkt price, use the proceeds to fund your calls, wait wait wait, profit

[Lemur]

@ertyu

Using https://www.optionsprofitcalculator.com ... t-put.html and calculating from naked put ...I'm not sure I fully understand. Looking at MSFT $165 puts for Feb 14. Seems like very little to no returns but maximum risk if one tries to sell puts below market price.

[jacob]

@ertuy - That creates a steep payoff curve (a lot of leverage) which will be financial suicide if the underlying goes down. With the puts being naked, the broker will likely step in at some point (demanding some cash to potentially cover) if the stock declines below the put strikes.

@Lemur - One old way (from the 1950s) would be to hold mostly cash (100%) and spend maybe up to 5% per year simply buying out of the money call options. You participate in the upside but your downside is limited to the cost of the options. At most you can lose 5% per year. It's not gambling as much as it's speculating. Doing this you're paying for a ticket to continued upside.

Another way would be to sell cash-covered out of the money puts. This requires the willingness to buy MSFT at a lower price if the market drops down below your strike price. Doing this you get a cashflow in return for insuring against a market drop.

[Dream of Freedom]

Your thesis is that the stock market will go up. Wouldn't options on QQQ or SPY match the thesis better than MSFT?

[ertyu]

spy put premiums are too thin. vol is crap

[Dream of Freedom]

Well that's great for buying calls.

[ertyu]

good point i automatically assumed we're talking about otm put selling

[Lemur]

@Dream of Freedom

Good point. I didn't think of SPY or QQQ...when I think of FOMO I think of the FAANG stocks but using SPY...


Looking at the 18th Sep $410.00 Call going for $0.07 an option. If I believe we're due for another rally due to FOMO before the U.S. elections, wouldn't this be really easy money?

On this call OPTION, If SPY bulls to $350 by March 3 (a 5% gain), that is a 500% return. So worst case is you lose your premium...best case you're looking at fantastic returns? I feel like I'm missing something...

Edit:

This might be what I'm forgetting...
https://www.investopedia.com/terms/t/theta.asp

[ajcoleman22]

yes, theta is important but I think the calculator takes that into account based on the way I read the chart. I am not expert on options.

[Lemur]

@ajcoleman22

Same. I should probably play with options with fake money for a while myself. I don't believe my brokerage Vanguard lets you even invest with options unless you have the cash to purchase the underlying shares anyway. That or you've to get some type of account privileges to do so.