When to buy a call or sell a put

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How long does one want to be?

When to buy a call or sell a put?  This should be a straight forward question but ask any two option traders and there will be two different answers.  My answer, a small cop-out, is it depends on what is going on.  The reality is buying a call or selling a put depends on how LONG ONE WANTS TO BE.  There is actually a pretty good distinction between the two.

Trade for plan, hedge for wrong

The first assumption is we want the stock to go up.  Rocket science you say and I say not so fast.  Take BA right now for example.  I expect BA will be back above $400 in a month or two.  I don’t expect that to happen this week or next although it might.  If your position is long delta there are no worries if it rallies so I take the expected result off the table.  When choosing the type of trade idea I assume my opinion is right but hedge in case I am wrong.

What does the put sale yield?

BA is exhibiting a more orbiting type of move after the first rash of bad news.  It could get worse and the stock market could decide to take the entire growth premium out of BA and send the stock back to $300 as in December.  If I sold a put I would do so there, at the yucky spot with the Jun 300 yielding 1% on a cash secured put.  That is hardly enough to get the blood pumping but a nice place to buy some stock.

Is there enough lift for a call?

BA at $400 does not look too bad but any resolution before May seems difficult.  The BA May17 400 calls are $8.   The decay on that call is enough to melt the Wicked Witch of the West in The Wizard of Oz.  The only things keeping that option from dying are earnings and the current maelstrom BA finds itself in.  With BA nearer the bottom of the current range there could be enough lift in another $10 move but now that the government is investigating “the pop” might take a while.

To orbit or pop

The decision is the “the orbit” with the short put or the “the pop” with a long call.  Short term the orbit in BA seems more likely with a pop out in time once the resolution becomes clear.  I like the short put or put spread on the orbit, and calls only when the upside is really worth it once the put trade proves correct.

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