If I believe that a stock price will double in 12 months or longer, what would be the best Options Strategy?

Answer 1

Believing "that a stock will double in price in 12 months or longer" is not enough information to choose the best options strategy.

Because options have fixed expiration dates, your need to choose an amount of time or less. If you buy a call option that expires in 12 months and the stock does not go up until 14 months later the price increase would be of no benefit to your option since it would not longer exist.

You also need to know that not all stocks have options, and that most stocks that have options do not have any expiring more than seven months in the future. Consequently you cannot use a 12 month option strategy for most stocks unless you a big enough player that you can negotiate customized "flex" options.

Even if you overcome these problems, choosing an optimal options strategy depends on comparing the amount of implied volatility to your own prediction of future volatility. My favorite option book tells me that if I think a stock will go up, but I do not have a prediction about future volatility, the only "correct" strategy is to simply buy the stock instead of trading options on it.

Finally, even if the stock was one that had long dated options (LEAPS) and I had a prediction about future volatility, I would not choose the strategy that would make the most money if the stock doubled. I do not have enough faith in my own predictions to choose the strategy with the highest possible reward since that strategy would also have the higherst risk.

Answer 2

Buy the option closest to one year away. The longer term options are called LEAPS and have expiration's in January (3rd Friday).

If you buy options with a strike price just above the current share price you will get a low cost investment that will go up at least as fast as the underlying share price.

Example: GE closed today at $36.11. You can buy a January 2008 call with a strike price of $37.50 for $175 plus commissions. This call option gives you the right to buy 100 shares of GE for $37.50. For each $1.00 GE goes above $37.50 the value of your contract will go up $100. So if GE is worth $72 next January the call contract you bought would be worth about $3,400.

This is not investment advise, just an example.