Options Education - Combining Cabot Options Trader and Cabot Growth Investor
I had a great email exchange this week with a subscriber who is relatively new to options. He is also a subscriber to Cabot Growth Investor and was interested in merging Mike Cintolo’s great stock picks with options. This is a strategy that many Cabot subscribers use. Here is our email chain that may be of value to many of you:
As I learn more about options, I’m curious how this could relate to my superscription to Cabot Growth Investor where I typically buy the stocks they recommend and hold them until they suggest I sell. The winners tend to really win and the losers or sideways stocks are cut pretty quickly. Would it make sense for me to buy a call option several months out instead of buying the actual stock they recommend and if it goes up as expected, then exercise my right to buy it? If it doesn’t go up as expected, then I’m only risking the cost of the option.
The strategy you mentioned is something a lot of Cabot subscribers use. They buy calls on Mike’s stocks essentially.
Feel free to run some of those ideas by me if you have questions.
Interesting. So Mike recommended a buy of --- tonight, currently trading at 117.50. What would be reasonable for an option call and why? There are so many choices - expirations and strike prices. For example if I bought one contract expiring on Dec 21st for 115 it would cost me $1,180. At 125 $740. At 100 $2,170. I’m picking these out of a hat - can you help educate me on what good dates and strike prices are? From a very novice point of view, wouldn’t buying 100 for $2,170 be better than 125 for $740 assuming the stock goes up to say 140 by Dec 21st? I’d be spending a little bit more now but then if I exercise the option I get $25 less cost of the stock * 100, right?
Essentially if I want to buy an option that will move aggressively higher with the stock then I would go with an in-the-money call such as the December 105 or 110 or 115 strike call. Why? Because these calls are so far in-the-money, and are likely to be exercised to turn into stock at expiration, they move nearly 1 for 1 with the stock price move. The deeper in-the-money, the more it will move up and down.
However, if I want MORE calls, you pay LESS with out-of-the money calls such as 120, 125, 130 strikes and have more buying power. Though of note, the further away from the stock price the less aggressively the call price will move up. Why? Essentially it’s less likely for these calls to finish in-the-money.
Personally I typically buy calls with 3-6 months until their expiration and just above the current stock price. But that is my style. And the subject of how to pick an expiration cycle and strike price is something I will be talking about at the Cabot Wealth Summit next week in Salem (I look forward to seeing many of you there!)