A. Why when you give buy points, is the higher strike price the safer play? I would think that the lower strike price is the safer play. B. When owning an option on a stock, do you normally sell it when it goes 'out of the money' and re-purchase at 'in the money'? If not initially, is there a point at which time you will? (December 12, 2000)
When we give 'aggressive' and 'safer' plays, the idea is that the safer play allows the stock to clear what has become resistance to the stock. Up to that point the move is more aggressive as it can be pushed back down by the overhead supply before it breaks through. When it does break through resistance on strong volume it has more or less clear sailing ahead of it as there are no longer any investors that have bought in at a higher resistance price. We love it when stocks break out of patterns or clear resistance on high volume as that indicates the stock has a lot of power behind the move.
What we do with options usually depends upon what the underlying stock does. As long as the stock is doing what we want it to do we will hang onto the option if we have a lot of time left before expiration. If the underlying stock breaks support or starts selling on higher volume, we usually exit the option. Depending upon when we bought that could be either in or out of the money. Now if we do not sell when we should have or wanted to and we have an option that has lost value because the stock dropped below where we wanted or expected it to we try to get out when the option has lost 25% of its value. That is not always possible as sometimes a stop loss may not be triggered on less liquid options. In that case, if the option gets down to 50% of what we paid for it, bail.
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