Smarter to buy a Sept 07 option, or Oct 07 option?

Question

Ok so its the end of the quater for company XYZ (whatever it is) and i know it has performed very well this quarter so on the day of the company conference i believe the stock will go up.

I only plan on keeping this stock for about a week, so i will buy a Sept 07 call option, but would i make more money by buying the sept call or oct. 07 call. because the october call is more expensive but the bid price would probably go higher, because no one will buy the stock with only 4 or 5 days left on the option right? like even if the stock goes higher the bid price for the sept call wouldnt change much because the option will expire in a couple more days.

that may be confusing, but bottom line, i want a stock for the short term would it be better to buy the sept 07 call or Oct 07 call.

Answer 1

Assuming the earnings announcement/conferenve call will occur next week, before the September options expire, it depends on the strike price.

If you buy an in-the-money or at-the-money strike price, the September options will go up faster. If you buy an out-of-the-money strke price, the September options will only go up faster if the stock price goes up very sharply.

One word of warning: the extrinsic value (sometimes called the time premium) of an option tends to be high shortly before earnings come out. After earnings, the implied volatility almost always drops, decreasing the extrinsic value of the options.

Finally, let me address your question "no one will buy the stock with only 4 or 5 days left on the option right?" (I assume you mean "option" instead of "stock".) If the option is in-the-money or at-the-money you should have no problem selling the option. If the option is out-of-the-money you are likely to have a problem finding a buyer.

Answer 2

The near month option will have higher gamma and higher delta for an at the money option than the October would.

So if you buy an ATM SEP07 option it would go up faster than the OCT07 option.

For an out of the money option, you would probably be throwing money away unless you bought say a 50 SEP07 for .10 and the price of the stock went from 45-55 in the week. Then you would make a ton of money.

An in the money option would closer match the stock price ( like a one for one move ) on the SEP07 option compared to a OCT07 option. Again, that is just the higher delta in the september option.