Care and Feeding of a Call?
As I have mentioned, I bought one Jan 15 250 Call last week as a learning exercise.
Aside from sitting around wishing I had bought 20 contracts, how should I be thinking about this option?
If the stock continues to rise will the option keep up at this rate of growth, or will it flatten out at some point?
It will eventually flatten to the point where 1$ change in stock price ~= 1$ change in option premium. Basically if it goes deep enough in the money your risk profile falls through the floor of it not being ITM at execution and the volatility drops off. This threshold changes depending on how much time is left to expiration. For example a call with an expiration of this Friday @ 200$ strike has much lower risk of happening, than say a January call @ 200 strike.
This is where having different exit strategies come into play because you want to consider how much of a return you expect to get out of this given different timeframes and thresholds. You would also apply the inverse of that for max potential loss (even if that threshold is 100% loss, that is still a threshold).
Normally when I shop for options, I am formulating a thesis behind why I expect the stock to go to certain price targets within a given timeframe. And you find yourself making lists of potential positive catalysts and negative catalysts that would move the stock up or down toward those targets. Once you meet that threshold that you set you should be looking for how you want to exit out of the position.
Now, if you were doing something as a form of "stock replacement" type strategy, it is normally hold until such time as you feel comfortable in rolling the options forward into a new position. (like converting a Jan 2015 LEAP into Jan 2017 LEAPs when they are released). But in the short to medium term (ie, not holding for 1 year or more) you are generally going to want to set up different targets for what would make you want to exit the position.
Once you exit. Don't necessarily just turn around and flip it for something else. You need to reevaluate the situation all over again to determine where you expect the stock to go given a certain timeframe and then execute on that new evaluation. At the same time while you hold a position, it isn't just blind holding based on the faith that your thesis pans out. As you get more data and the picture becomes clearer, you should be updating your thesis as it pans out. Maybe Elon had an unexpected tweet about how there was an accident at the factory. Well you weren't necessarily planning for this, so you should update your data, and adjust if you should sell, or continue to hold.
Generally though, I still find myself finding a happy multiple that I expected the stock to run up to, and once I hit that multiple I sell regardless. Because what you don't want to do is get yourself caught in the "just one more dollar" game... trying to figure out the exact top. If you are sitting on a 300% return and sell don't get upset because you *could* have had 350%. Because there is no way for you to really get the top and bottom exactly right and you shouldn't really try to.
