Buy a cheap call option?

[lazyday]

http://www.smartmoney.com/commonsense/index.cfm?story=20070130

....Intel calls. I noticed that the premium amounted to only pennies a share. I wasn't planning to buy any, but I couldn't resist this level of a bargain. With the successful Microsoft experience still in my mind and Intel trading at slightly over $20, I bought the $10 calls expiring in 2009 for just over $10 a contract. Yes, you read that right — 2009. That's nearly two years, for which I paid a premium of a few cents.

First reader comment to the article:

You could also SELL the 2009 Put with a strike of $30 for $9.10 bid. INTC closed Tuesday @20.93 +.04 for the day. So the short put would (1) make you a few cents rather than costing you money, (2) deposit $910 per contract into your brokerage account right now, and (3) give you dollar-for-dollar profit up to 43.5% appreciation in the underlying over the next two years.

I've never messed with options before, and maybe never will, but this sounded interesting. Do any of you think this is a good buy at today's price? Any other stocks with cheap calls, or expensive puts? What's a good way to find them? How to decide if cheap? Does broker really deposit cash into account when sell a naked put? (I've heard most don't let you get good interest on cash when selling stock short, but never tried.) Where's an easy and/or trustworthy place to check up on the latest prices for calls and puts?

I know that many people think it's usually better to find a stock to buy and sell the call, rather than buy a call on speculation, but my theory is that too many people are selling calls, so some of them may be cheap.

 

[brewer12345]

I buy cheap, out of the money calls all the time. I usually do so on stuff I think is attractive and I try to buy calls with at least 3 months left until expiry (6+ is better). But I do it with limited amounts of capital and I am fully aware that every penny spent on options is at risk of 100% loss.

Bear in mind that options amount to investing on leverage and act accordingly.

 

[cute fuzzy bunny]

For what its worth, I would expect intc shares to move only modestly in the short to medium term.

The "technological breakthrough" announced by intel and IBM amounts to merely a continuation of the same die shrinkage rate as has been historically possible. In other words, its letting them break through a previous barrier that would have stopped the trendline and instead is allowing it to continue at more or less the same rate.

Intels new die efficiency allowing them to make mobile, server and desktop chips on the same wafer is big, and their newest processors are top notch, but their continued price war with AMD is muting the benefits.

I would see absolutely no reason for either to raise prices any time in the near future. Intels new head is a sales guy and he knows where his strengths are: deep money filled pockets, high efficiency manufacturing, broad distribution, brand recognition and those give you one primary benefit...outlast the other guy in a sustained price war.

AMD had some better stuff over the last few years after decades of substandard cheap copycat knock-offs. Their role at this time and for the foreseeable future is as nothing more than a profit sap on intel until AMD either take a technologically superior lead (and it'd have to be a big one) or the company drops dead.

Intel ****ed up for a couple of years on the basis of a collection of idiots being in charge that wanted to "do what we've always done, because it worked". There may be still more of that as the old mistake was believing for too long and too far on clock speed and deep pipelines, it may now be swinging too far in favor of the "more cores!" strategy. Excepting some server applications, more than 2 cores is a little overkill and four is probably overkill for the next 5 years until the software catches up...IF it catches up.

Then you have the problem of replacement cycle lengthening. Someone with a quad core machine that has two or three cores sleeping most of the time will find their machine getting faster with age as the software makes use of better threading practices. THATS something thats never happened before. Of course, bloatware and further bad programming practices may mute the benefit.

So, once again the market is efficient in pricing those calls...

The stock pays a nice small dividend, which I dont think you get with the calls...and I would expect that any break will be to the upside and fairly decent once they break AMD's back. Just maybe not for the next year...or two...or...

And I own not one share, excepting whats held in the indexes within my target retirement 2025/2045 funds.

 

[lazyday]

Well, in spite of all the time I waste online on investing, I guess I'm too lazy to really persue this.

Does seem to be a good deal though. Seems a lot like buying on margin, but paying almost no interest and losing the (relatively small) dividend.

 

[brewer12345]

Does seem to be a good deal though. Seems a lot like buying on margin, but paying almost no interest and losing the (relatively small) dividend.

Broadly correct assessment with one quibble: interest cost is baked into the price of the option.

 

[cute fuzzy bunny]

And probably seeing no significant price movement in the near term either, which is why its priced so cheeep.