A Brief Commentary on Buying Out-of-the-money calls (Preview)

By Lawrence G. McMillan

We rarely buy out-of-the-money calls, because when you do, there is a chance that you could be right about the direction of the underlying stock (up), but still lose money. Normally, we prefer a slightly in-the- money call with a delta of 0.6 or higher, so that it will move more in line with a rising stock. In that case, if I’m right about the direction of the stock, I have a strong chance of making money with my call – even though it may suffer some time decay.